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22 February 2007
Asia Pacific
Equity Research
Small Cap Companies
How to Spend Your Lai See
Research Analysts
Kenny Lau, CFA
852 2101 7914
[email protected]
Clifford Lam
852 2101 7138
[email protected]
Vincent Chan
852 21016568
[email protected]
Gabriel Chan, CFA
852 2101 6523
[email protected]
Hon Sze Leong
603 2723 2086
[email protected]
Clarice Khoo
65 6212 3746
[email protected]
Sidney Yeh
886 2 2715 6368
[email protected]
SECTOR REVIEW
Small stocks, big profits
■ It is a joyful Chinese New Year – a recent survey shows that 30% of
people are paying ‘bigger’ Lai See amid an improving economy this
year. Total circulation of Lai See money in China is estimated at
US$25 bn a year. One meaningful way to make use of this ‘lucky
money’ is to invest it in the stock market.
■ Many Chinese are calling 2007 the Year of the ‘Golden Pig’, as the pig
is a lucky animal in the Chinese horoscope. The Hang Seng Index has
shown a favourable upward trend in the past three Years of the Pig.
■ In this report, we focus on five key ‘Lai See’ picks, with an average
potential upside of 47%, and put our regional ‘Heads’ together to
identify 13 other ideas in Asia. Our Heads of China and Hong Kong
Research also share their own particular view on the market outlook
and their top picks for the Year of the Pig.
Sai Sarinee Sernsukskul
662 614 6218
[email protected]
Siriporn Sothikul, CFA
662 614 6217
[email protected]
Credit Suisse Asia Equity Research
852 2101 6000
[email protected]
Source: Credit Suisse
ANALYST CERTIFICATIONS ARE IN THE DISCLOSURE APPENDIX. FOR OTHER IMPORTANT DISCLOSURES,
visit www.credit-suisse.com/ researchdisclosures or call +1 (877) 291-2683. U.S. Disclosure: Credit Suisse does
and seeks to do business with companies covered in its research reports. As a result, investors should be aware that
the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report
as only a single factor in making their investment decision. Customers of Credit Suisse in the United States can receive
independent, third party research on the company or companies covered in this report, at no cost to them, where such
research is available. Customers can access this independent research at www.credit-suisse.com/ir or call 1 877 291
2683 or email [email protected] to request a copy of this research.
22 February 2007
Focus charts
Figure 1: Hang Seng Index in the 1971 Year of the Pig
Figure 2: Hang Seng Index in the 1983 Year of the Pig
450
1,200
+23%
+58%
375
1,050
300
900
225
750
150
600
Jan 71
Apr 71
Jul 71
Oct 71
Jan 72
Feb 83
Source: Datastream, Credit Suisse estimates
May 83
Aug 83
Nov 83
Source: Datastream, Credit Suisse estimates
Figure 3: Hang Seng Index in the 1995 Year of the Pig
12,500
11,000
+58%
9,500
8,000
6,500
Feb 95
May 95
Aug 95
Nov 95
Feb 96
Source: Datastream, Credit Suisse estimates
Figure 4: The focus Lai See picks and Heads of Research picks outperformed MSCI Asia ex. Japan in the Year of the Dog
160
+50%
140
+29%
120
100
80
Jan 06
Mar 06
May 06
Jul 06
Heads of Research picks
Sep 06
Fiv e focus picks
Nov 06
Jan 07
MSCI Asia ex -Japan
Source: Datastream, Credit Suisse estimates
How to Spend Your Lai See
2
22 February 2007
Focus charts
Figure 5: Valuation table of the five Lai See focus picks
Market
Stock
CY07E
cap
code
Company
0571.HK
eSun
Rating
Price
O
HK$7.05
EVGN.KL Evergreen Fibreboard
O
GEMS.SI
Gems TV
O
2548.TW
Huaku Construction
SF.BK
Siam Future
EPS
CY08E
P/E
(US$ mn) chg (%)
740
-18.5
RM1.32
181
S$1.50
1,005
O
NT$63.30
O
Bt8.80
EPS
(x) chg (%)
P/E (x)
Pot.
yield
Target upside
(%)
price
(%)
- HK$10.20
44.7
8.0
32.1
30.9
8.1
34.6
6.0
6.2
RM2.00
51.5
54.0
18.4
47.3
12.5
1.6
S$1.94
29.2
329
66.8
5.4
25.2
4.3
8.5 NT$99.00
56.4
125
0.4
9.5
-22.8
12.2
4.2
53.4
26.8
9.9
23.3
8.2
4.1
P/E
EPS
Average
6.1
CY07E
Bt13.50
47.0
Source: Company data, Credit Suisse estimates
Figure 6: Valuation table of the China top picks
Market
Stock
Price
Rating (HK$)
CY07E
cap
CY08E
EPS
(US$ mn) chg (%)
(x) chg (%)
CY07E
P/E
yield
Target
Pot.
price upside
code
Company
(x)
(%)
(HK$)
2866.HK
China Shipping Container Lines
O
3.01
2,324
100.0
37.3
400.0
7.5
0.6
3.2
(%)
6.3
0728.HK
China Telecom
O
3.70
38,342
11.5
12.2
20.7
10.1
2.6
4.2
13.5
2727.HK
Shanghai Electric
O
4.07
6,197
16.7
19.0
14.3
16.7
1.9
5.0
22.9
0576.HK
Zhejiang Expressway
O
6.12
3,403
5.6
15.9
15.8
13.8
4.2
7.0
14.4
P/E
EPS
Source: Company data, Credit Suisse estimates
Figure 7: Valuation table of the Hong Kong top picks
Market
Stock
Price
Code
Company
Rating
(HK$)
0002.HK
CLP Holdings Limited
O
58.80
0010.HK
Hang Lung Group
O
0011.HK
Hang Seng Bank
O
0013.HK
Hutchison Whampoa
O
79.45
CY07E
cap
CY08E
EPS
(US$ mn) chg (%)
(x) chg (%)
CY07E
Target
Pot.
P/E
yield
price
upside
(x)
(%)
(HK$)
(%)
18,124
8.1
13.7
0.2
13.7
4.4
69.0
17.3
26.65
4,546
37.4
15.3
34.7
11.3
2.4
33.9
27.2
111.30
27,235
8.6
16.3
9.5
14.9
5.2
123.0
10.5
43,354
-63.4
41.4
99.5
20.7
2.2
97.0
22.1
Source: Company data, Credit Suisse estimates
Figure 8: 13 picks for the Year of the Pig from our sector and country heads
Code
Stock
0011.HK
Hang Seng Bank
HLAA.SI
Hong Leong Asia
0010.HK
Hang Lung Group
TACC.SI
Total Access Comms
Price Market
HK$111.30 Hong Kong
S$2.00 Singapore
HK$26.65 Hong Kong
$4.10 Thailand
Analyst
Why?
Bill Stacey
Lot of resources to expand financial services into China
Bradley Burch
A collection of China businesses at half of China multiples
Clifford Lam
Cheap and leveraged play of Hang Lung Properties
Colin McCallum
Highly geared to regulatory change in Thai cellular market
5009.TWO Gloria Material
NT$52.40 Taiwan
Ernest Fong
Leading speciality steel maker for advanced applications
0906.HK
China Netcom
HK$19.92 China
Jeff Kahng
Free upside on potential 3G licence and ind. restructuring
0200.HK
Melco
HK$15.66 Hong Kong
Kenny Lau
Cheapest Macau gaming concession holder
2353.TW
Acer Inc
NT$60.70 Taiwan
Manish Nigam
Potential to become the no. 3 PC player in the world
CTRS.JK
Ciputra Surya
Mirza Adityaswara
Beneficiary of a surge in investment demand for property
Nilesh Jasani
Exposure of the medicine for long-term or chronic diseases
Stephen Hagger
Upside on closing price gap between MDF and plywood
Trina Chen
Most efficient cement producer and consolidator in China
Vincent Chan
Beneficiary of China’s growing power plant projects
LUPN.BO Lupin
EVGN.KL Evergreen Fibreboard
0914.HK
Anhui Conch Cement
2727.HK
Shanghai Electric
Rp950 Indonesia
Rs598.50 India
RM1.32 Malaysia
HK$24.75 China
HK$4.07 China
Source: Company data, Credit Suisse estimates
How to Spend Your Lai See
3
22 February 2007
Kung Hei Fat Choi
Lai See, Lai See
Of all the traditional Chinese festivals, the New Year is perhaps the most elaborate and
important. This is a time for the Chinese to congratulate each other and themselves on
having passed through another year, a time to see out the old year and to welcome in the
New Year.
Chinese New Year is
the most elaborate
and important festival
for Chinese
Giving red packets during Chinese New Year is a tradition. ‘Good luck’ money is wrapped
in little envelopes called Lai See (see Figure 9). The packet is usually red or gold in colour,
symbolising good luck and vitality. Lai See is typically handed out to children and
unmarried people by their parents, grandparents, relatives, close neighbours and friends.
Bosses also give Lai See to their colleagues on the first working day of the New Year for
luck in the coming year.
Red packet, or Lai See,
symbolises good luck
and vitality
Figure 9: Lai See packets
Source: Credit Suisse
According to an unofficial survey, each child or unmarried person receives US$100-300 of
Lai See money on average during the Chinese New Year in Hong Kong. There are no
statistics on how much Lai See money is given out in China. If we assume each mainland
child under 15 receives Lai See money of US$50 on average in a year, the total amount
could reach US$13 bn in China. Assuming the total amount of Lai See money to
unmarried people and employees is of a similar size, the total circulation of Lai See money
in China is estimated to be US$25 bn a year. This is equivalent to about 39 days of trading
turnover on the Shanghai stock market!
Lai See money’s circulation
in China is estimated to
reach US$25 bn a year
Shanghai’s ‘A’ Share Index and Hong Kong’s Hang Seng Index recorded spectacular
returns of 130% and 30%, respectively, in the Year of the Dog. The Lai See payers are
likely to give ‘bigger’ Lai See so that even a three-year-old child can share the joy of a
stock market bull run. According to a survey conducted by the Hong Kong Research
Association, about 30% of Lai See givers are paying more Lai See amid an improving
economy this Chinese New Year.
How to Spend Your Lai See
4
22 February 2007
Figure 10: Shanghai ‘A’ Share Index
Figure 11: Hang Seng Index
3,500
22,000
20,000
+138%
2,500
+30%
18,000
1,500
16,000
14,000
500
Jan 06
May 06
Sep 06
Source: Datastream, Credit Suisse estimates
Jan 06
Jan 07
May 06
Sep 06
Jan 07
Source: Datastream, Credit Suisse estimates
Mr Joseph Yam, Chief Executive of the Hong Kong Monetary Authority (HKMA), called on
people to protect the environment to use good-as-new notes (‘fit notes’), instead of brandnew notes for Lai See last Chinese New Year. The public seemed to respond positively –
the HKMA printed 226 mn new notes in 2006, or 25% less than the year before. The
HKMA saved about HK$37 mn on printing costs and, most importantly, saved about
1,300 trees.
HKMA printed fewer new
notes, and saved HK$37 mn
and 1,300 trees
There may be fewer people using brand-new notes, or even ‘fit notes’ this year. Why? Has
the public become more environmentally conscious? Not necessarily. Given the
continuous appreciation of the renminbi, people from Hong Kong should be more pleased
to receive Lai See in renminbi than in Hong Kong dollars. Mr Yam should not be too
complacent when he sees the demand for brand-new Hong Kong dollar notes continuing
to fall this year. The burden of printing brand-new notes for Lai See may simply be shifting
from the HKMA to the People’s Bank of China.
People in Hong Kong may
be more willing to receive
Lai See in renminbi, due to
its appreciation
Year of the ‘Golden Pig’?
How do the people make use of the lucky money? Some may buy toys, gadgets, clothes
or save it in the bank. However, wouldn’t it be more meaningful to make your Lai See
money grow into a bigger fortune? One way to grow your Lai See money would be to
invest in the stock market. Focusing on small caps could be the most appropriate tactic (as
the money is too little for investing in big-cap stocks).
One way to grow Lai See
money is to invest it in the
stock market
Is the Year of the Pig an auspicious one for stock investment?
Many Chinese are calling 2007 the Year of the ‘Golden’ Pig. The pig is a lucky animal in
the Chinese horoscope – the Chinese see that pigs eat food all the time, enjoy sleeping all
day long and worry about nothing during their entire lives. Chinese also like the shiny gold,
which is a sign of wealth and prestige. It is a Chinese folk custom to prefix ‘golden’ to
something believed to be lucky, such as a ‘golden pig’, ‘golden monkey’, etc. However,
according to the traditional stem-branch system of the Chinese calendar, 2007 is actually
a ‘Fire Pig’, or 24th out of the 60 stem-branches in the system, and not actually a ‘Golden
Pig’ year. Since fire is equivalent to the colour red in the traditional Chinese five-element
system, 2007 is also called the ‘Red Pig’ year.
The pig is a lucky animal in
the Chinese horoscope
No matter how we refer to the 2007 Year of the Pig, what we are interested is whether
2007 a good year to invest our Lai See money in the stock market. There is a Chinese folk
belief that the 12 Chinese horoscopes may have some effect on the general investment
environment for the whole year.
The past three Years of the
Pig recorded favourable
returns in the stock market
In the past three Years of the Pig (1971, 1983 and 1995), the Hang Seng Index rose 58%,
23% and 58%, respectively (see Figures 12, 13 and 14).
How to Spend Your Lai See
5
22 February 2007
Figure 12: Hang Seng Index in the 1971 Year of the Pig
450
Figure 13: Hang Seng Index in the 1983 Year of the Pig
1,200
+23%
+58%
375
1,050
300
900
225
750
150
600
Jan 71
Apr 71
Jul 71
Oct 71
Jan 72
Source: Datastream, Credit Suisse estimates
Feb 83
May 83
Aug 83
Nov 83
Source: Datastream, Credit Suisse estimates
Figure 14: Hang Seng Index in the 1995 Year of the Pig
12,500
11,000
+58%
9,500
8,000
6,500
Feb 95
May 95
Aug 95
Nov 95
Feb 96
Source: Datastream, Credit Suisse estimates
Previous Years of the Pig showed favourable upward trends. These pigs seemed able to
fly. Nevertheless, investors should always exercise the usual rational judgement and
caution when they are planning to grow their Lai See by investing in the stock market.
How to Spend Your Lai See
6
22 February 2007
The focus Lai See picks
In order to grow their Lai See money, which is usually a small amount, we believe that
investors should focus on small caps, where the initial investment cost is relatively small,
but not the growth potential – small stocks, potentially big profits.
To grow the small amount of
Lai See money, focus on
small caps
We have picked five small caps in the region with average potential upside of 47% by our
estimates, over the next 12 months (or until you receive your next batch of Lai See money).
They come from different sectors in different markets – Macau gaming, Malaysia forest
products, Singapore home shopping, Taiwan and Thailand property – each with a unique
story. Our five focus picks are:
Hong Kong
■ eSun Holdings (0571.HK, HK$7.05, OUTPERFORM, TP HK$10.20)
Malaysia
■ Evergreen Fibreboard (EVGN.KL, RM1.32, OUTPERFORM, TP RM2.00)
Singapore
■ Gems TV (GEMS.SI, S$1.50, OUTPERFORM, TP S$1.94)
Taiwan
■ Huaku Construction (2548.TW, NT$63.30, OUTPERFORM, TP NT$99.00)
Thailand
■ Siam Future Development (SF.BK, Bt8.80, OUTPERFORM, TP Bt13.50)
Figure 15: Valuation table of the five Lai See focus picks
Market
Stock
code
Company
0571.HK
eSun
Rating
CY07E
cap
EPS
Price (US$ mn)
CY08E
P/E
EPS
CY07E
P/E
yield
Pot.
Target
upside
chg (%)
(x)
chg (%)
(x)
(%)
price
(%)
740
-18.5
8.0
32.1
6.1
-
HK$10.20
44.7
RM1.32
181
30.9
8.1
34.6
6.0
6.2
RM2.00
51.5
S$1.50
1,005
54.0
18.4
47.3
12.5
1.6
S$1.94
29.2
O
NT$63.30
329
66.8
5.4
25.2
4.3
8.5
NT$99.00
56.4
O
Bt8.80
125
0.4
9.5
-22.8
12.2
4.2
Bt13.50
53.4
26.8
9.9
23.3
8.2
4.1
O
HK$7.05
EVGN.KL Evergreen Fibreboard
O
GEMS.SI
Gems TV
O
2548.TW
Huaku Construction
SF.BK
Siam Future
Average
47.0
Note: O = OUTPERFORM
Source: Company data, Credit Suisse estimates
It is our belief that undemanding valuations are a prerequisite for a small-cap stock to
perform. Given the inherent risk of lower trading liquidity, business volatility and a general
lack of research coverage, Lai See money, not the widows-and-orphans funds, should be
the more appropriate source of funds to invest in small caps.
Our five Lai See picks have
average P/Es of 9.9x, with
potential upside of 47%
The five focus Lai See picks are trading at estimated 2007E P/Es ranging from 5.4x to
18.4x, or an average of 9.9x, some 32% cheaper than the 14.5x of the MSCI Asia ex.
Japan Index. We expect an average potential upside of 47%.
How to Spend Your Lai See
7
22 February 2007
Figure 16: Hong Kong – eSun
Why? Gabriel Chan believes:
(HK$)
10
8
6
4
2
Feb 06
Jun 06
Oct 06
Feb 07
eSun is a leading entertainment company in Asia and has organised
numerous concerts in Hong Kong, Las Vegas and other cities around the
world. In addition, eSun also manages over 30 leading Asian pop stars.
We believe it can leverage off its entertainment business by arranging for
its Asian pop stars to perform in Macau, which should attract not only
mainland Chinese, but also tourists from South-East Asia. Unlike other
Macau gaming companies, eSun will receive an advance positive cash
inflow from the formation of the JV before the casinos actually open.
Macau Studio City should be on solid ground to compete with other
casinos. A reasonable discount to NAV of 14% would translate into a 45%
potential upside.
Source: Datastream, Credit Suisse estimates
Figure 17: Malaysia – Evergreen
Why? Hon Sze Leong believes:
(RM)
1.5
1.3
1.1
0.9
0.7
Feb 06
Jun 06
Oct 06
Feb 07
Global medium-density fibreboard (MDF) prices have risen 24% YoY,
pulled up by the rising price of plywood, for which MDF is the closest
substitute. The rise in plywood prices is the result of global demand
exceeding tropical timber resources, which are constrained by
environmental issues. Evergreen Fibreboard is on an acquisition and
expansion drive to become one of the top ten MDF players in the world. It
has recently announced the acquisition of a competitor that will add 14% to
FY07 earnings onwards, and we expect more corporate developments to
unfold over the course of 2007. Our target price of RM2.00, or potential
upside of 52%, values Evergreen on an FY07E P/E of 13x, or a PEG ratio
of 0.4x.
Source: Datastream, Credit Suisse estimates
Figure 18: Singapore – Gems TV
Why? Clarice Khoo believes:
(S$)
1.7
Gems TV’s business model of an integrated manufacturer and a TV home
shopping retailer of coloured gemstone jewellery differentiates it from other
home shopping channels and ‘bricks and mortar’ retailers with the strong
value proposition it offers to end-consumers. With the scaleability of the
low-cost manufacturing base in Thailand, it capitalises on its first-mover
advantage to expand into new markets, such as the US, which we
estimate will contribute over 50% of total core revenue in FY08E. We
believe that at 17x FY08E P/E, or potential upside of 29%, it represents an
attractive risk-reward profile, given Gems TV’s short history and the
execution risks related to its expansion plans.
1.5
1.3
1.1
Nov 06
Dec 06
Jan 07
Feb 07
Source: Datastream, Credit Suisse estimates
How to Spend Your Lai See
8
22 February 2007
Figure 19: Taiwan – Huaku
Why? Sidney Yeh believes:
(NT$)
90
Huaku plans to launch five projects, with an estimated value of NT$11.9 bn
in 1H07, as Huaku remains very positive on Taipei City property. We are
positive on its new strategy of diverse locations in Taipei City. We estimate
that blended project margins will climb to 36.5% this year, up from 34.4%
in 2006. Of the five projects, the margins range from 20-50%, in our
modelling, compared with the company’s guidance of 20-35%. All the
projects launched this year should filter into earnings for 2007, 2008 and
2009. After the recent panic selling, Huaku now trades at a very cheap
valuation of 5.4x FY07E and 4.3x FY08E P/E. Our target price of NT$99
represents potential upside of 56%.
75
60
45
30
Feb 06
Jun 06
Oct 06
Feb 07
Source: Datastream, Credit Suisse estimates
Figure 20: Thailand – Siam Future
Why? Sai Sarinee Sernsukskul believes:
(Bt)
11.0
Siam Future looks set for another strong year, driven by the opening of its
Esplanade Mall and Pattaya Mall. Average retail space is expected to rise
74% YoY in 2007. With the opening of Kaset Navamin and Ratchayothin in
2008, average retail space will rise a further 12% YoY. The Esplanade is
now 95% booked and the Kaset Navamin project has secured three
anchor tenants, which take up half of its lettable space. We like its ‘utilitylike’ business model (through back-to-back long-term leases to tenants
and long-term leases from land owners) and ‘growth option’. Management
indicated that there are likely to be more projects in the pipeline. Our target
price of Bt13.5 represents 53% potential upside.
9.5
8.0
6.5
5.0
Feb 06
Jun 06
Oct 06
Feb 07
Source: Datastream, Credit Suisse estimates
How to Spend Your Lai See
9
22 February 2007
Golden Pigs in China & Hong Kong
China – the pig can run! Both back and forth
Vincent Chan, China Research
As an investor, if you want to survive in the Year of the Pig, you better not be lazy, you
need to remain nimble – and a dose of whisky every night to calm yourself down before
going to bed might not be a bad idea. Generally speaking, don’t be a pig. Why? Because
we expect a roller-coaster year for China stocks. In the year to date, we have already seen
that the volatility of China stocks has increased substantially compared to over the past
few years, and there are very good reasons why such volatility is likely to continue or even
increase through the next year. We suggest investors be prepared for it.
Market volatility likely to
continue or even increase
Figure 21: Volatility Index of China stocks – annualised standard deviation of weekly change
(%)
50
41%
40
30
26%
25%
23%
27%
26%
22%
33%
32%
22%
20%
42%
26% 27%
22%
20
21%
19%
17%
17%
35%
24%
22%
21%
20%
10
0
2002
2003
2004
H Share
Red Chips
2005
A Share
2006
2007 YTD
MSCI China
Source: Datastream, Credit Suisse estimates
There are good reasons for such high volatility, in our view. On the one hand, we expect
economic growth in China to remain strong, inflation remains low, the trade surplus remain
large and the renminbi to appreciate to RMB7.4:US$ or even higher by the end of 2007.
However, we believe that most of the good news has already been discounted, and that the
market is already very expensive. Based on the 99 China stocks that we currently cover, the
simple average P/E of these stocks in 2007E and 2008E are 30.6x and 22.8x, respectively –
this is a very expensive market! However, as past boom-bust cycles in the stock market
show us, there is seldom a meaningful correction in stock markets if the economic/corporate
earnings growth outlook remains good and only the market is expensive. Therefore, we
expect appetite and apprehension to continue to co-exist in the market this year, and this
should generate volatility.
Stock markets seldom see a
meaningful correction if the
economic/corporate
earnings growth outlook
remains good
A shares are still likely to outperform H shares this year, in our view, despite the higher
valuation. Is this ironic? Yes, but we live in an ironic world anyway. We believe the
domestic A-share market will probably continue to correct for a while, given the
government’s recent stance to cool down the stock market. However, the big picture for
this market is that liquidity is abundant. Even after the rapid expansion and P/E rerating of
the A-share market, the total market cap of the Shanghai and Shenzhen markets
(including A and B shares) is still around RMB10.6 tn. This is huge in absolute terms, but it
is still less than one-third of outstanding deposits at RMB33.5 tn – very low compared to
other markets. We believe that there is simply abundant liquidity to support a much bigger
stock market boom (or bubble) in China after this correction.
A shares are still likely to
outperform H shares
this year
How to Spend Your Lai See
10
22 February 2007
To prevent this from happening, we believe the government would have to undertake very
aggressive measures basically to destroy the confidence of domestic investors in the
market. But is this likely to happen, after the government spent so much effort and money
to revive the A-share market after its prolonged four-year bear market? Unlike previous
unfulfilled statements on the non-tradable share reform of A shares, the government (as
the major shareholder of most companies) has really spent massive amounts of money to
compensate minority shareholders in order to return investor confidence in the market.
The Chinese government is
unlikely to undertake
aggressive measures to
cool down the stock market
After the massive rally in 2006, valuations of Chinese financials and many consumer
goods companies have reached a very demanding level. Therefore, they are likely to
correct more compared to many other sectors, such as telecoms, commodities and
transportation. We like China Telecom (0728.HK, HK$3.70, OUTPERFORM, TP HK$4.20),
China Shipping Container Lines (2866.HK, HK$3.01, OUTPERFORM, TP HK$3.20),
Shanghai Electric (2727.HK, HK$4.07, OUTPERFORM, TP HK$5.00) and Zhejiang
Expressway (0576.HK, HK$6.12, OUTPERFORM, TP HK$7.00).
Chinese financials and
many consumer goods
stocks are likely to correct
more
China top picks for the Year of the Pig
Figure 22: Shanghai Electric
(HK$)
4.5
4.0
3.5
3.0
2.5
2.0
Feb 06
Jun 06
Oct 06
Feb 07
For our regional utilities analyst Angello Chan’s best-rated China stock
there are a number of catalysts that could help the stock to perform: 1) we
believe China’s power demand is likely to be revised upwards by the
NDRC (National Development and Reform Commission), since actual
power demand in the past two years had been consistently higher than
forecast. This could lead to more power plant construction projects being
approved, in our view, and thus be good for the company’s orders; 2)
China has finalised the third generation nuclear power technology transfer
and award the contract to Westinghouse (not listed). With the standard
decided, new projects should be granted, and we expect Shanghai
Electric to receive a large share of the orders; 3) the recent drive by the
Chinese government in energy efficiency to encourage more power
projects to buy equipment from large manufacturers, such as Shanghai
Electric, of which the production technology is more advanced; 4) we
believe that the corruption scandal, which created an overhang on the
company’s share price performance in 2006, is likely to be alleviated with
the publication of its internal audit by a major independent international
accounting firm.
Source: Datastream, Credit Suisse estimates
Figure 23: China Telecom
Valuation of the company, at 11.5x 2007E P/E, is very reasonable
compared with other Chinese companies. Most importantly, our telecoms
analyst, Jeffrey Tan expects China to issue 3G licences this year, and
China Telecom is likely to get one of them. We believe that this would be a
major new growth driver for the company, and would help the company to
overcome its current problems, i.e., the fixed line to mobile switch, which
hurts the subscription base of the company.
(HK$)
4.6
4.0
3.4
2.8
2.2
Feb 06
Jun 06
Oct 06
Feb 07
Source: Datastream, Credit Suisse estimates
How to Spend Your Lai See
11
22 February 2007
Figure 24: China Shipping Container
Credit Suisse’s Asian transportation research team has upgraded its
outlook for container freight rates. Most importantly, we expect container
freight rates to stabilise in 2007, after being down by almost 10% from the
peak in 2004, and start to go up again in 2008. Given the high operating
leverage in this sector, a 1% change in freight rates could lead to a 30%
increase in net profits on average. We believe that China Shipping
Container should benefit significantly from this cyclical upturn. However,
the only caveat is that the share prices of stocks in this sector have rallied
in the past two weeks. Investors should wait for some correction in share
prices before entering, in our view.
(HK$)
3.2
2.8
2.4
2.0
1.6
Feb 06
Jun 06
Oct 06
Feb 07
Source: Datastream, Credit Suisse estimates
Figure 25: Zhejiang Expressway
At 15.9x 2007E P/E and with a 4.2% dividend yield, our China analyst,
Jason Baverstock, believes this stock could prove very defensive and
favoured by investors in a volatile stock market environment. It is no
longer trading at a premium to other expressway companies, even though
it deserves a premium, given its track record of consistently being able to
deliver better-than-sector average returns. Also, with its strong cash
position and robust cash flow generating ability ahead, we believe the
company is in a very good position to either increase its dividend payout
or purchase more highway projects from its parent company.
(HK$)
7.0
6.2
5.4
4.6
3.8
Feb 06
Jun 06
Oct 06
Feb 07
Source: Datastream, Credit Suisse estimates
Figure 26: Valuation table of the China top picks
Market
Stock
code
Price
CY08E
EPS
(HK$) (US$ mn) chg. (%)
P/E (x) chg (%)
CY07E
Target
Pot.
yield
price
upside
(%)
P/E (x)
(%)
(HK$)
China Shipping Container Lines
3.01
2,324
100.0
37.3
400.0
7.5
0.6
3.2
6.3
0728.HK
China Telecom
O
3.70
38,342
11.5
12.2
20.7
10.1
2.6
4.2
13.5
2727.HK
Shanghai Electric
O
4.07
6,197
16.7
19.0
14.3
16.7
1.9
5.0
22.9
Zhejiang Expressway
O
6.12
3,403
5.6
15.9
15.8
13.8
4.2
7.0
14.4
0576.HK
Rating
CY07E
EPS
O
2866.HK
Company
cap
Note: O = OUTPERFORM
Source: Company data, Credit Suisse estimates
How to Spend Your Lai See
12
22 February 2007
Hong Kong – The great piggy bank robbery
Clifford Lam, Hong Kong Strategy and Regional Property Research
Quite unlike the last Year of the Pig (1995), when we saw a decline in retail sales, we
believe that the focus of 2007 will be on ‘spending’. However, unlike the pick-up in
2003/04, which was driven by tourists, we expect private domestic consumption to drive
retail sales in 2007. With the increase in salaries, fat bonuses and the wealth effect
created by all those IPOs, it just seems logical that many of us would go out and buy new
clothes, new furniture, a new car, or treat ourselves to a nice dinner or a nice vacation.
The focus in 2007 is
on spending
Figure 27: YoY change in retail sales value and sales volume
(%)
40
30
20
10
0
-10
-20
-30
1982
1984
1987
1989
1992
YoY change in retail sales value
1994
1997
1999
2002
2004
YoY change in retail sales volume
Source: Datastream, Credit Suisse estimates
Property – Only if you are buying things <HK$3 mn or >HK$30 mn
What about property? We believe that the housing market, particularly the secondary
market, will rebound in 2007 and that a 5-10% increase in prices is quite possible.
However, if you really see property as an investment, we would only suggest buying flats
<HK$3 mn (driven by salary increases from first-time home buyers) or >HK$30 mn (driven
by the wealth effect and the influx of liquidity).
Appetite for property as an
investment has reduced
substantially
Unlike the early 1990s, when most of us were more than willing to hand over our hardearned cash (and Lai See money) to property developers, there are so many other
alternatives nowadays. One could buy a flat in Beijing, Shanghai or even Macau; give a
private banker a call and see what structured product they might have; or, go out and buy
a limited edition watch or a Ferrari (yes, we are serious). All of these ‘alternative
investments’ would yield you a better return, in our view. We believe that, for end-users,
new homes in the up-graders’ market are just too expensive at a 15-20% premium to the
secondary market. Do some math and see how much more you need to pay if you are
upgrading in Hong Kong.
Upgrade you car rather than
your apartment … it might
make more sense
economically
Cars, watches and handbags – limited runs, the name of the game
Conventional wisdom says that 80% of the wealth is concentrated in 20% of the population.
After the worldwide asset price inflation over the past couple of years, our guess is that the
ratios are closer to 80% and 2%. Do you know that out of the 1.2 mn salary-tax payers in
Hong Kong, the top 100,000 contribute more than 60%? There is only one direction for
prices of luxury goods to go. So rather than spending HK$3 mn on a down-payment for an
average flat, go buy a Ferrari F430 (not to mentioned the F599), as quotas for 2007
productions are changing hands at about HK$200,000+. People appear willing to buy the
How to Spend Your Lai See
If you had paid a 10%
deposit on a 25 Porsche
GT3 last summer, someone
would be willing to buy it
from you for HK$150,000+
now
13
22 February 2007
quota of a March 2007 production Porsche GT3 (HK$1.7 mn) at HK$150,000. Why? All of
them are on limited runs. Dealers of Japanese cars are still giving out discounts to move
inventory. Believe it or not, in our view your luxury good purchases can make money so
long as they are on limited production runs.
What about the stock market?
Here comes the hard part. What about the stock market? We believe that being an
investor in the stock market will be tough in the Year of the Pig. With retail and luxury
spending the only theme in the Year of the Pig, there isn’t much to drive the stock market.
Large developers selling ten homes at HK$200 mn each does not really contribute much
to the bottom line. Negative real interest rates? With the chances of an earlier-thanexpected US interest rate cut becoming more remote, we would not count on it. Frankly,
the Hang Seng Index now reflects less on Hong Kong and increasingly more on China.
This may be disappointing, but we are not going to give you a Hang Seng Index target
here. Rather, we believe that stock picking is far more important. We like Hutchison
Whampoa (0013.HK, HK$79.45, OUTPERFORM, TP HK$97.00), Hang Lung Group
(0010.HK, HK$26.65, OUTPERFORM, TP HK$33.89), Hang Seng Bank (0011.HK,
HK$111.30, OUTPERFORM, TP HK$123.00) and CLP Holdings (0002.HK, HK$58.80,
OUTPERFORM, TP HK$69.00).
We see no theme in the
Year of the Pig – stockpicking continues to be
more important
Hong Kong top picks for the Year of the Pig
Figure 28: Hutchison Whampoa
When was the last time you took a real look at Hutchison? Hutchison is
probably the most under-owned large-cap stock in Hong Kong, which is
exactly the reason to have it in the Year of the Pig, in our view. Our
conglomerate analyst, Cusson Leung, expects a continuous narrowing of
3G losses and, based on simple operating leverage, we believe that this
should be an easy earnings turnaround story with ~HK$19 bn incremental
earnings over the next two years. Don’t forget about China either.
Together with Cheung Kong (0001.HK, HK$102.50, OUTPERFORM,
TP HK$109.73), the two stocks have one of the biggest landbanks in
China among the listed companies. At 20.7x 2008E P/E, any positives
from 3G are likely to induce a sharp rerating, in our view.
(HK$)
85
80
75
70
65
Feb 06
Jun 06
Oct 06
Feb 07
Source: Datastream, Credit Suisse estimates
Figure 29: Hang Lung Group
The story is simple – 99% of HLG’s NAV is Hang Lung Properties
(0101.HK, HK$22.10, OUTPERFORM, TP HK$23.61). Hence, HLG is a
pure proxy to HLP. However, while HLP is trading at par to its FY08E NAV,
HLP is trading at a 30% discount. All other holding companies, which are
less of a proxy to their listed stub, are at much narrower discounts.
Somehow, this gap has to close. This is a leveraged play into the much
sought after investment property in China too. Every HK$1 movement in
HLP’s share price would translate into HK$1.6 in HLG. Cheap and
leveraged – what more could you ask for, in our view?
(HK$)
30
25
20
15
10
Feb 06
Jun 06
Oct 06
Feb 07
Source: Datastream, Credit Suisse estimates
How to Spend Your Lai See
14
22 February 2007
Figure 30: CLP Holdings Limited
Recommending a utility company at the beginning of the year may seem
rather boring, but we think CLP is different. Believe it or not, this is a
growth story. With the government going ‘greener’ and the fact that there
are no hydro resources in Hong Kong, we believe that it is just a matter of
time before the government gives CLP approval to build the proposed
HK$8 bn LNG terminal as part of the post-2008 Scheme of Control (SoC)
review. Furthermore, our utilities analyst, Angello Chan, believes that with
the increasing public capex in infrastructure, power grid-related capex
should increase as well. All are expected to drive growth beyond 2008E,
despite the new SoC arrangement. Trading at a 2007E P/E of just 13.5x,,
the valuation is undemanding, in our view.
(HK$)
60
55
50
45
40
Feb 06
Jun 06
Oct 06
Feb 07
Source: Datastream, Credit Suisse estimates
Figure 31: Hang Seng Bank
Few investors would see Hang Seng Bank as a China play. However, we
believe this is likely to change in 2007. As one of the eight foreign banks to
have received approval to incorporate in China, HSB is poised to double
its footprint to 30 outlets by mid-year. Furthermore, HSB owns 16% of
Industrial & Commercial Bank of China (1398.HK, HK$4.62,
OUTPERFORM [V], TP HK$4.38), which we estimate could generate as
much as a HK$5-10 bn gain if it listed on the A-share market. Is 5x P/B
expensive? Our banks analyst, Jay Luong, believes not. Using the Gordon
Growth model, HSB has, in the past ten years, delivered growth well
above where share price valuations have suggested in an ex-growth
market, i.e., Hong Kong. With China opening up for HSB, we believe the
stock is likely to fare even better in the next ten years as well.
(HK$)
115
110
105
100
95
90
Feb 06
Jun 06
Oct 06
Feb 07
Source: Datastream, Credit Suisse estimates
Figure 32: Valuation table of the Hong Kong top picks
Market
Stock
CY07E
CY08E
CY07E
Target
Pot.
upside
Price
cap
EPS
P/E
EPS
P/E
yield
price
Rating
(HK$)
(US$ mn)
chg (%)
(x)
chg (%)
(x)
(%)
(HK$)
(%)
CLP Holdings Limited
O
58.80
18,124
8.1
13.7
0.2
13.7
4.4
69.0
17.3
0010.HK
Hang Lung Group
O
26.65
4,546
37.4
15.3
34.7
11.3
2.4
33.9
27.2
0011.HK
Hang Seng Bank
O
111.30
27,235
8.6
16.3
9.5
14.9
5.2
123.0
10.5
0013.HK
Hutchison Whampoa
O
79.45
43,354
-63.4
41.4
99.5
20.7
2.2
97.0
22.1
code
Company
0002.HK
Note: O = OUTPERFORM
Source: Company data, Credit Suisse estimates
How to Spend Your Lai See
15
22 February 2007
Putting our heads together
In addition to the five well-chosen Lai See focus picks, our country and sector heads have
carefully selected 13 of their favourite stocks from their sectors or countries. The ‘official’
potential upside of some of these 13 stocks is less than that of the five focus picks.
However, the heads of research believe that these supplementary picks for the Year of the
Pig could have much more potential upside if the business environment is right.
Another 13 picks from our
heads of research …
These 13 interesting stocks come from different sectors in China, Hong Kong, India,
Indonesia, Malaysia, Singapore, Taiwan and Thailand, with FY07E P/E ratios ranging from
7x to 24.4x.
… with P/Es ranging from 7x
to 24.4x
Figure 33: 13 picks for the Year of the Pig from our sector and country heads
Code
0011.HK
HLAA.SI
0010.HK
TACC.SI
5009.TWO
0906.HK
0200.HK
2353.TW
CTRS.JK
LUPN.BO
EVGN.KL
0914.HK
2727.HK
Stock
Hang Seng Bank
Hong Leong Asia
Hang Lung Group
Total Access Comms
Gloria Material
China Netcom
Melco
Acer Inc
Ciputra Surya
Lupin
Evergreen Fibreboard
Anhui Conch Cement
Shanghai Electric
Price
HK$111.30
S$2.00
HK$26.65
$4.10
NT$52.40
HK$19.92
HK$15.66
NT$60.70
Rp950
Rs598.50
RM1.32
HK$24.75
HK$4.07
Market
Hong Kong
Singapore
Hong Kong
Thailand
Taiwan
China
Hong Kong
Taiwan
Indonesia
India
Malaysia
China
China
Analyst
Bill Stacey
Bradley Burch
Clifford Lam
Colin McCallum
Ernest Fong
Jeff Kahng
Kenny Lau
Manish Nigam
Mirza Adityaswara
Nilesh Jasani
Stephen Hagger
Trina Chen
Vincent Chan
Why?
Lot of resources to expand financial services into China
A collection of China businesses at half of China multiples
Cheap and leveraged play of Hang Lung Properties
Highly geared to regulatory change in Thai cellular market
Leading specialty steel maker for advanced applications
Free upside on potential 3G licence and ind. restructuring
Cheapest Macau gaming concession holder
Potential to become the no. 3 PC player in the world
Beneficiary of a surge in investment demand for property
Exposure of the medicine for long or chronic diseases
Upside on closing price gap between MDF and plywood
Most efficient cement producer and consolidator in China
Benefit from China’s growing power plant projects
Source: Company data, Credit Suisse estimates
Last year, our heads of research also carefully chose 12 stock ideas for the Year of the
Dog. This equal-weighted portfolio recorded a return of 50% in the Year of the Dog,
outperformed the MSCI Asia ex. Japan by 16%.
Figure 34: The focus Lai See picks and heads of research picks outperformed MSCI Asia
ex. Japan in the Year of the Dog
The picks of our 12 heads
of research last year
recorded a 50% return,
outperforming MSCI Asia
ex. Japan by 16%
160
+50%
140
+29%
120
100
80
Jan 06
Mar 06
May 06
Heads of Research picks
Jul 06
Sep 06
Fiv e focus picks
Nov 06
Jan 07
MSCI Asia ex -Japan
Source: Datastream, Credit Suisse estimates
The equal-weighted portfolio of our five focus picks last year also recorded a return of 50%
in the Year of the Dog, outperformed the MSCI Asia ex. Japan by 16%.
After the neck-and-neck competition between the heads of research picks in the Year of
the Dog, our heads of research have bent their minds to choosing 13 picks this year in
order to be the stock picker in the Year of the Pig.
How to Spend Your Lai See
Five Lai See picks last year
also recorded 50% return,
outperforming MSCI Asia
ex. Japan by 16%
16
22 February 2007
We wish investors a successful and prosperous Year of the Pig. Kung Hei Fat Choi!
Bill Stacey – Regional Banking Research
(HK$)
115
110
105
100
95
90
Feb 06
Jun 06
Oct 06
Feb 07
Chinese New Year sees people hope for prosperity in the times ahead. If
their hopes are fulfilled, they will need a bank, an investment advisor and a
range of other financial services. We firmly view the financial sector as the
ideal haven for Lai See money. Hang Seng Bank provides more than its
share of crisp new notes for the red packets – and gets them back in lowcost deposits. It is putting its shareholders’ money to good work, in our
view, investing in and expanding in China. It has the resources to do this
on a scale that smaller Hong Kong banks do not have, and what we
consider a pool of Chinese management talent to drive that expansion that
few of the larger banks have. It is our top pick for the Year of the Pig.
Insurance, however, is not a sector for optimists. Insurers sell protection
from bad luck. Despite this, the China insurers have done extremely well in
the past 12 months. We consider this a good time to be short China Life
Insurance (2628.HK, HK$23.15, U, TP HK$16.50). High equity markets
mean less insurance sales; the risk of disappointment from the highest
insurance valuations in the region is enormous, in our view.
Hang Seng Bank (0011.HK, HK$111.3, OUTPERFORM, TP HK$123.00)
Market cap
(US$ mn)
27,235
3-yr EPS
FY07E
FY07E
FY07E
FY07E
CAGR (%)
P/E (x)
P/B (x)
yield (%)
ROE (%)
9.5
16.3
5.2
5.3
31.4
Bradley Burch – Singapore Research
A collection of above-average businesses in China (Singapore
management and, nowadays, governance standards) at just over half the
China market multiples. Plus, you get a local building materials business
that is currently printing Lai See (speaking figuratively, of course). For
example, HLA was making decent profits selling manufactured sand at
S$10/tonne during the summer (among other products). By the beginning
of this year, the building boom pushed sand prices to around S$20/tonne.
Since Indonesia joined the countries banning natural sand exports, the
price of HLA’s sand has shot up to S$35/tonne, with industry sources
predicting S$50/tonne after Chinese New Year.
(S$)
2.2
1.9
1.6
1.3
1.0
Feb 06
Jun 06
Oct 06
Feb 07
Hong Leong Asia (HLAA.SI, S$2.00, OUTPERFORM, TP S$2.58)
Market cap
(US$ mn)
496
How to Spend Your Lai See
3-yr EPS
FY07E
FY07E
FY07E
FY07E
CAGR (%)
P/E (x)
P/B (x)
yield (%)
ROE (%)
46.7
8.5
1.6
5.3
17.2
17
22 February 2007
Colin McCallum – Regional Telecoms Research
Total Access Communications, the second-largest player in Thailand’s
three-player cellular market, held a 30.8% market share by subscriber and
a 33.3% market share by revenue as at 3Q06. Penetration is currently only
55.6%. Furthermore, TAC is highly geared to the positive impact of
regulatory change. TAC had been paying 40% of revenue to various
regulatory bodies, but has strong legal grounds for this to be cut to 25%
following the introduction of an interconnection regime. Interconnection
should also help to solve the other key problem with the Thai cellular
market – aggressive price competition. Assuming that tariffs stabilise and
the regulatory changes proceed, TAC could grow its EBITDA at
36.8% YoY into FY07E, earnings could rise 94.4%, and the stock could be
rerated by 57%, by our estimates.
(S$)
5.0
4.5
4.0
3.5
3.0
Feb 06
Jun 06
Oct 06
Feb 07
Total Access Communications (TACC.SI, $4.10, OUTPERFORM, TP $6.45)
Market cap
(US$ mn)
1,945
3-yr EPS
CAGR (%)
FY07E
P/E (x)
FY07E
P/B (x)
FY07E
yield (%)
FY07E
ROE (%)
3.7
7.3
1.4
5.8
20.6
Clifford Lam – Hong Kong and Property Research
The story is simple – 99% of HLG’s NAV is Hang Lung Properties
(0101.HK, HK$22.10, O, TP HK$23.61); hence, HLG is a pure proxy for
HLP. However, while HLP is trading at par to its FY08E NAV, HLP is at a
30% discount. All other holding companies, which are less of a proxy to
their listed stub, are at much narrower discounts. Somehow, this gap has
to close, in our view. This is also a leverage play into the much-soughtafter investment property in China. Every HK$1 movement in HLP’s share
price would translate into HK$1.6 in HLG. Cheap and leveraged – what
more could you ask for?
(HK$)
30
26
22
18
14
Feb 06
Jun 06
Oct 06
Feb 07
Hang Lung Group (0010.HK, HK$26.65, OUTPERFORM, TP HK$33.89)
Market cap
(US$ mn)
4,546
How to Spend Your Lai See
3-yr EPS
FY07E
FY07E
FY07E
FY07E
CAGR (%)
P/E (x)
P/B (x)
yield (%)
ROE (%)
35.0
15.4
1.3
2.3
8.9
18
22 February 2007
Ernest Fong – Taiwan Research
When taking a plane, people often take for granted the R&D, not to
mention the costs, that go into making the plane safe and airworthy. Well,
the next time your plane takes off and lands, think of Gloria Material,
Taiwan’s leading speciality steel maker, specialising in stainless and alloy
steel for advanced applications. Gloria has been qualified by many global
industrial heavyweights, the most recent being Boeing (BA, $89.94, O, TP
$104.00, MW) to provide speciality steel for landing gear. With ten Ph.Ds
in a staff of 55 working in Gloria’s R&D division, it could be said that Gloria
has relatively more Ph.Ds than most tech companies in Taiwan. Therefore,
we believe the stock should continue its rerating, as current valuations are
closer to the run-of-the-mill (pun intended) steel companies.
(NT$)
60
50
40
30
20
Feb 06
Jun 06
Oct 06
Feb 07
Gloria Material Technology (5009.TWO, NT$52.40, OUTPERFORM, TP NT$58.00)
Market cap
(US$ mn)
460
3-yr EPS
CAGR (%)
FY07E
P/E (x)
FY07E
P/B (x)
FY07E
yield (%)
FY07E
ROE (%)
48.2
10.8
2.9
6.0
27.2
Jeffrey Kahng, Regional Telecoms Research
(HK$)
26
22
18
14
10
Feb 06
Jun 06
Oct 06
Feb 07
We believe China Netcom offers free upside on its potential 3G mobile
licence (2H07) and industry restructuring. Assuming a three-player mobile
market and no upfront licence cost, we forecast substantial value for the
number-three mobile licence in China. We value its fixed-line business
using DCF at HK$16.33/share and probability-weighted mobile potential
upside of HK$3.21/share. Predicting the outcome of 3G is difficult, but we
believe investors will be well rewarded by owning China Netcom, given its
low valuation, high dividend yield and lower 3G technology risk. For China
Telecom (0728.HK, HK$3.7, O, TP HK$4.20), there may be negative
market sentiment and start-up problems if it has to build CDMA or
TDSCDMA network. China Mobile (0941.HK, HK$75.0, N, TP HK$71.30)
should remain the strongest player, with solid results in 4Q06 and 1Q07
expected to support the share price further. For China Unicom (0762.HK,
HK$10.4, N, TP HK$10.25), we believe its high valuation means more
downside risk if M&A does not come through. Lastly, Telefónica’s
(TEF.MC, Eu 17.15, O, TP Eu 17.50, MW) recent announcement of plans
to raise its stake in Netcom from 5% to 9.9% should provide technical
support for China Netcom.
China Netcom Group Corp (0906.HK, HK$19.92, OUTPERFORM, TP HK$19.50)
Market cap
(US$ mn)
16,847
How to Spend Your Lai See
3-yr EPS
FY07E
FY07E
FY07E
FY07E
CAGR (%)
P/E (x)
P/B (x)
yield (%)
ROE (%)
(2.6)
11.4
1.2
3.7
13.8
19
22 February 2007
Kenny Lau, CFA – Regional Small-cap Research
(HK$)
26
22
18
14
10
Feb 06
Jun 06
Oct 06
Feb 07
With the profit-taking after the spin-off of its Macau gaming JV, Melco PBL
(MPEL.OQ, $18.08, O [V], TP $26.20), in the US, by our estimates, Melco
has become the cheapest Macau gaming concession holder. Melco-PBL
has the most balanced product mix between the fast-growing mass market
and the lucrative high-roller segment in Macau, in our view. This should
help the company achieve a superior return on investment and sustainable
long-term growth. While the market has low expectations for its Crown
Macau (grand opening schedule for April 2007), our gaming analyst,
Gabriel Chan, believes that this six-star, high-roller-focused casino should
run well with the help of Crown’s prestige clientele and the leading junkets
in Macau. Melco is currently trading at 10.8x 2009E P/E, which makes it
the cheapest among its four listed competitors, which are trading at 22.736.3x 2009E P/E (based on I/B/E/S consensus estimates). Investing the
Lai See money in Melco should see more upside than playing in its Crown
Macau casino.
Melco (0200.HK, HK$15.66, OUTPERFORM [V], TP HK$26.10)
Market cap
(US$ mn)
2,462
3-yr EPS
FY07E
FY07E
FY07E
FY07E
CAGR (%)
P/E (x)
P/B (x)
yield (%)
ROE (%)
n.a.
n.a.
6.2
-
n.a.
Manish Nigam – Regional Technology Research
(RM)
80
75
70
65
60
55
50
45
40
Feb 06
Jun 06
Oct 06
Feb 07
We believe that Windows Vista, multi-core processors and emerging areas
are catalysts that will accelerate global PC unit growth in 2007, assuming
the global economy remains intact. Although competition from HewlettPackard (HPQ, $42.83, O, TP $50.00, MW), Dell (DELL, $23.90, O, TP
$28.00, MW) and Lenovo (0992.HK, HK$3.13, U, TP HK$2.72)
undoubtedly remains, the three primary pillars behind our positive stance
on Acer are: 1) profitable growth through economies of scale and
strengthening global branding, 2) a good position in the improved unit
growth cycle in 2007, EMEA and emerging markets, and 3) an effective
indirect business model and competitive cost structures. In 2006, despite
price competition, Acer was able to outgrow its peers and gain market
share. As PC peers’ (mainly Dell) aggressive pricing strategy did not
translate into market share (in fact, it simply resulted in margin erosion for
the company), we expect pricing to remain disciplined in 2007. In the
longer term, we believe that Acer can become the number-three PC player
in the world, based on its strengthening brand recognition and strengths in
the NB PC market.
Acer Inc. (2353.TW, NT$60.70, OUTPERFORM, TP NT$75.00)
Market cap
(US$ mn)
4,247
How to Spend Your Lai See
3-yr EPS
FY07E
FY07E
FY07E
FY07E
CAGR (%)
P/E (x)
P/B (x)
yield (%)
ROE (%)
14.9
10.9
2.0
5.8
18.3
20
22 February 2007
Mirza Adityaswara – Indonesia Research
Indonesia’s interest rate has dropped below 10% for only the second time
in its history, and the robust economic growth outlook should fuel the
country’s property sector. Focusing on land lot sales, the most attractive
asset class for property investors, in our view, given the low maintenance
cost, CTRS should benefit from a surge in investment demand for
property. At the current share price level of Rp950, CTRS is trading at a
48% discount to its 2007E NAV of Rp1,819/share. We value CTRS at a
30% discount to 2007E NAV, or at Rp1,275/share, implying 36% potential
upside from the current level.
(RP)
1,200
1,000
800
600
400
Feb 06
Jun 06
Oct 06
Feb 07
Ciputra Surya Tbk PT (CTRS.JK, Rp950.00, OUTPERFORM [V], TP Rp1275.00)
Market cap
(US$ mn)
3-yr EPS
CAGR (%)
FY07E
P/E (x)
FY07E
P/B (x)
FY07E
yield (%)
FY07E
ROE (%)
(45.9)
24.4
1.6
2.4
6.5
207
Nilesh Jasani – India Research
(Rs)
650
575
500
425
350
Feb 06
Jun 06
Oct 06
Feb 07
The last thing one thinks of these days, probably, when one thinks of India,
is a pharmaceutical company. But the Year of the Pig is unlikely to belong
to India’s high-profile growth stories, in our view, given some variable
macro changes. We believe pharmaceuticals is likely to be one of the few
sectors providing shelter. The competitive environment in the world of
medicine is such that it pays more to serve those with long-term or chronic
diseases than those with acute diseases. This is where Lupin is making a
significant transition, which is having a stabilising influence on its growth
pattern. Elsewhere, Lupin has demonstrated strong execution in the US
market, and we expect its US growth to continue with several new
launches. Lupin has also outperformed the Indian formulations market in
the past two years. The bulk of Lupin’s fixed investment is now behind it,
and we expect margins to improve as leverage comes into play.
Lupin Ltd (LUPN.BO, Rs598.50, OUTPERFORM, TP Rs698.31)
Market cap
(US$ mn)
1,087
How to Spend Your Lai See
3-yr EPS
FY07E
FY07E
FY07E
FY07E
CAGR (%)
P/E (x)
P/B (x)
yield (%)
ROE (%)
37.6
23.1
5.9
0.7
25.0
21
22 February 2007
Stephen Hagger – Malaysian Equities
(RM)
1.4
1.2
1.0
0.8
0.6
Feb 06
Jun 06
Oct 06
Feb 07
Evergreen is a medium density fibreboard (MDF) manufacturer. MDF is
broadly inter-changeable with plywood, so MDF prices normally show a
similar trend to plywood prices. Tropical hardwood plywood prices have
been surging for the past 12 months, due to: 1) reduced supply of logs and
plwood from Indonesia, due to a crackdown on illegal logging and a lack of
investment in the downstream industry, 2) increased demand from Japan
as its economy recovers, causing a surge in housing starts, and
3) increased demand from China and India. Evergreen is unloved by
domestic investors, due to a disastrous IPO and being unknown to foreign
investors. However, we have found the controlling shareholders to be
reliable, and we expect liquidity to improve as the share price rises. Given
that the free float is 50%, the average traded volume should increase. The
stock is trading at an undemanding 2007E P/E of 8.1x, with earnings risk
lying on the upside if plywood prices continue to rise and as the gap
between MDF and plywood prices closes. Based on our target price of
RM2.0, this stock offers 52% potential upside.
Evergreen Fibreboard Bhd (EVGN.KL, RM1.32, OUTPERFORM, TP RM2.00)
Market cap
(US$ mn)
181
3-yr EPS
FY07E
FY07E
FY07E
FY07E
CAGR (%)
P/E (x)
P/B (x)
yield (%)
ROE (%)
31.1
8.1
1.4
6.2
17.9
Trina Chen – Regional Basic Materials Research
(HK$)
30
25
20
15
10
Feb 06
Jun 06
Oct 06
Feb 07
In the basic materials space, we are most excited about the Chinese
cement sector, and our top pick is Anhui Conch, the most efficient cement
producer in China, in our view, and a consolidator in the eastern and
southern regions of the country. With a cyclical recovery on the back of
two to three years of troughed market, we expect margins to recover to
mid-cycle levels in 2007E and 2008E, driving Anhui Conch to deliver
earnings growth of 57% in 2007E and 22% in 2008E. The long-awaited
closure of small vertical kilns, thanks to the renewed focus on the
environment and energy/resources, combined with accelerated M&A
activity in the sector, are pointing the way to the consolidation, which could
prove a powerful rerating story for the cement sector in general. Our 12month target price is HK$30, on the back of the cyclical recovery along. In
a ‘blue sky’ scenario, where the Chinese cement sector achieves the
profitability (or ASPs rise 15% from the current level, and all else being
equal) of an averaged consolidated market, we would expect a multi-year
target price of HK$45.
Anhui Conch Cement (0914.HK, HK$24.75, OUTPERFORM, TP HK$30.00)
Market cap
(US$ mn)
4,963
How to Spend Your Lai See
3-yr EPS
FY07E
FY07E
FY07E
FY07E
CAGR (%)
P/E (x)
P/B (x)
yield (%)
ROE (%)
57.7
15.5
3.0
1.0
19.2
22
22 February 2007
Vincent Chan – China Research
(HK$)
4.4
3.8
3.2
2.6
2.0
Feb 06
Jun 06
Oct 06
Feb 07
The top pick China stock of Angello Chan, our regional utilities analyst. We
see a number of potential catalysts that could help the stock to outperform:
1) China’s power demand is likely to be revised upwards by the National
Development and Reform Commission, as actual power demand in the
past two years has been consistently higher than forecast. This could lead
to more power plant construction projects being approved – good for the
company’s order book, 2) China has finalised the third-generation nuclear
power technology transfer and awarded the contract to Westinghouse –
with the standard decided, new projects should be granted, and we expect
Shanghai Electric to receive a large share of the order, 3) the recent drive
by the Chinese government in energy efficiency to encourage more power
projects to buy equipment from large manufacturers, such as Shanghai
Electric, whose production technology is more advanced, and 4) the
corruption scandal that had been an overhang for the company’s share
price performance in 2006 is likely to be alleviated with the publication of
its internal audit by a major independent international accounting firm.
Shanghai Electric Group Co., Ltd (2727.HK, HK$4.07, OUTPERFORM, TP HK$5.00)
Market cap
(US$ mn)
6,197
How to Spend Your Lai See
3-yr EPS
FY07E
FY07E
FY07E
FY07E
CAGR (%)
P/E (x)
P/B (x)
yield (%)
ROE (%)
16.1
19.1
3.2
1.9
16.6
23
22 February 2007
How to Spend Your Lai See
24
22 February 2007
Five Lai See Focus Picks
How to Spend Your Lai See
25
22 February 2007
Asia Pacific / Hong Kong
Casinos & Gaming
eSun Holdings Limited
(0571.HK / 571 HK)
Rating
OUTPERFORM*
Price (15 Feb 07)
7.05 (HK$)
Target price
10.20 (HK$)¹
Chg to TP (%)
44.7
Mkt cap (HK$ mn) 5,778.91 (US$ 740.09)
Enterprise value (HK$ mn)
5,460.29
Number of shares (mn)
819.70
Free float (%)
61.70
52-week price range
8.53 - 3.18
* Stock ratings are relative to the relevant country index
¹ Target Price is for 12 months
[V] = Stock considered volatile (see Disclosure Appendix).
Research Analysts
Gabriel Chan, CFA
852 2101 6523
[email protected]
Completing the missing link
■ More than just casinos. In order to transform Macau into the Las Vegas of
the east, the gaming city needs to offer other elements besides new casinos.
We find these elements in eSun.
■ An ‘offer you can’t refuse’. In April and December 2006, eSun entered into
agreements to sell 40% and 20% interests in the Macao Studio City to New
Cotai (not listed) and CapitaLand (CATL.SI, S$7.40, UNDERPERFORM,
TP S$5.78), respectively. With minimum guaranteed rental from the casinos,
plus the HK$3.5 bn net disposal gain in cash from the two partners, eSun’s
actual investment cost in the project is only HK$2.6 bn.
■ Leveraging off Asian pop stars. eSun is a leading entertainment company
in Asia and has organised numerous concerts in Hong Kong, Las Vegas and
other cities around the world. In addition, eSun also manages over
30 leading Asian pop stars. We believe that the company can leverage off its
entertainment business by arranging for its Asian pop stars to perform in
Macau, which should attract not only mainland Chinese, but also tourists
from south-east Asia.
■ Undemanding valuation. Unlike other Macau gaming companies, which
normally have massive cash outflow before the casinos actually open, eSun
will receive an advance positive cash inflow from the formation of the JV. We
believe that Macau Studio City is on solid ground to compete with other
casinos, given company CEO Mr Friedman’s expertise in the gaming
business and eSun’s close working relationships with Asian pop stars. eSun
is currently trading at a 38% discount to its fair NAV per share, which we
believe is excessive. Our target price of HK$10.20 is based on a more
reasonable discount to NAV of 14%. With 38% potential upside, we rate
eSun OUTPERFORM.
Share price performance
9
7
5
3
1
Feb-05 Jun-05 Oct-05
Price
Feb-06 Jun-06 Oct-06
Price Relative
The price relative chart measures performance against the
HANG SENG index which closed at 20538.42 on 15/02/07
On 15/02/07 the spot exchange rate was HK$7.81/US$1
Performance over
Absolute (%)
Relative (%)
1M
-9.4
-11.5
3M
-13.3
-19.4
12M
122.0
66.7
Financial and valuation metrics
Year
Revenue (HK$ mn)
EBITDA (HK$ mn)
EBIT (HK$ mn)
Net income (HK$ mn)
EPS (CS adj., HK$)
- change from prev. EPS (%)
- consensus EPS
EPS growth (%)
P/E (x)
Dividend yield (%)
EV/EBITDA (x)
P/B (x)
ROE (%)
Net debt/equity (%)
12/05A
141.0
-71.1
213.9
210.5
0.29
n.a.
n.a.
-235.4
24.0
—
-80.7
2.5
10.3
net cash
12/06E
167.8
-31.2
116.5
866.5
1.08
0.0
1.91
267.0
6.5
—
-175.2
1.7
25.9
net cash
12/07E
201.5
-27.7
99.7
721.5
0.88
0.0
1.87
-18.3
8.0
—
-176.2
1.4
17.8
net cash
12/08E
244.0
-21.7
136.1
952.8
1.16
0.0
0.12
32.1
6.1
—
-189.8
1.2
19.0
net cash
Source: Company data, Thomson Financial Datastream, Credit Suisse estimates
How to Spend Your Lai See
26
22 February 2007
Key financial data
Key earnings drivers
Year-end 31 Dec
Company description
2004A
2005A
2006E
2007E
2008E
5.0
5.6
6.8
8.0
9.7
YoY growth (%)
44.3
11.3
21.3
18.9
20.8
Macau’s tourist visitation (mn)
16.7
18.7
21.7
24.9
28.7
YoY growth (%)
40.2
12.2
15.8
15.0
15.0
2004A
2005A
2006E
2007E
2008E
2004A
2005A
2006E
2007E
2008E
Net sales
152.8
141.0
167.8
201.5
244.0
Cash and ST investments
18.5
177.1
449.3
1,025.3
1,799.0
Cost of goods sold
Receivables
Macau’s GGR (US$ bn)
Profit and loss
Year-end 31 Dec (HK$ mn)
eSun Holdings invests in and produces entertainment events, provides
artiste management services, operates websites, licenses motion
pictures, produces television programmes, operates satellite television
channel, and provides advertising agency services.
Balance sheet
Year-end 31 Dec (HK$ mn)
139.4
123.4
141.9
169.6
204.3
63.2
78.5
58.7
70.5
85.4
Gross profit
13.3
17.6
25.9
31.9
39.7
Inventory
0.8
3.1
5.0
6.0
7.3
Operating costs
73.9
96.9
77.2
80.8
83.7
Other current assets
2.7
0.0
0.0
0.0
0.0
(60.6)
(79.3)
(51.3)
(48.9)
(44.0)
Total current assets
85.2
258.8
513.1
1,101.9
1,891.8
Operating profit
Non-operating inc./(exp.)
EBIT
Interest/expense
6.8
2.6
3.4
4.0
4.9
(31.9)
213.9
116.5
99.7
136.1
Net fixed assets
Other assets
207.7
195.1
183.0
171.7
1,820.3
2,788.2
2,936.8
3,116.9
12.7
2.9
8.0
2.0
(3.7)
-
-
-
-
-
Exceptionals
(109.7)
(2.4)
756.4
621.2
810.0
Total LT assets
1,873.1
2,028.1
2,983.3
3,119.8
3,288.6
Pre-tax profit
(147.5)
211.2
868.3
722.9
954.7
Total assets
1,958.3
2,286.8
3,496.3
4,221.7
5,180.3
(2.0)
0.7
1.7
1.4
1.9
Short-term debt
180.7
4.0
4.0
4.0
4.0
Minorities
0.0
0.0
0.0
0.0
0.0
Payables
108.7
108.6
21.0
25.2
30.5
Net profit
(145.5)
210.5
866.5
721.5
952.8
Other current liabilities
Net profit ex. excep.
(145.5)
210.5
866.5
721.5
952.8
Total current liabilities
(0.22)
0.29
1.08
0.88
1.16
Taxes
EPS
Profit and loss common statement
Year-end 31 Dec (%)
Net sales
Cost of goods sold
Gross profit
Operating costs
Operating profit
Non-operating inc./(exp.)
EBIT
Interest/expense
2004A
2005A
2006E
2007E
2008E
100
100
100
100
100
91
87
85
84
84
9
13
15
16
16
Assoc. & other LT invest.
166.0
1,707.0
-
-
-
-
-
292.3
116.0
26.7
30.7
36.4
Long-term debt
19.0
126.5
126.5
126.5
126.5
Other liabilities
13.3
0.1
0.1
0.1
0.1
Preferred stock
-
-
-
-
-
Total liabilities
324.6
242.6
153.4
157.3
163.0
Shareholders funds
1,633.6
2,044.2
3,343.0
4,064.5
5,017.3
Total liabilities and equity
1,958.3
2,286.8
3,496.3
4,221.7
5,180.3
2004A
2005A
2006E
2007E
2008E
Key ratios and valuation
48
69
46
40
34
(40)
(56)
(31)
(24)
(18)
Year-end 31 Dec
4
2
2
2
2
Valuation ratios
(21)
152
69
49
56
P/E (x)
n.m.
24.0
6.5
8.0
6.1
8
2
5
1
(2)
EV/sales (x)
39.1
40.7
32.5
24.2
16.8
n.m.
n.m.
n.m.
n.m.
n.m.
2.9
2.5
1.7
1.4
1.2
Exceptionals
(72)
(2)
451
308
332
EV/EBITDA (x)
Pre-tax profit
(97)
150
517
359
391
P/BVPS (x)
(1)
1
1
1
1
Growth (%)
Taxes
Minorities
0
0
0
0
0
Sales (%)
56.2
(7.7)
19.0
20.1
21.1
Net profit
(95)
149
516
358
391
EBIT (%)
nm
nm
(45.5)
(14.4)
36.5
Net profit ex. excep.
(95)
149
516
358
391
Net profit (%)
nm
nm
311.7
(16.7)
32.1
EPS (%)
nm
nm
267.0
(18.3)
32.1
EBITDA margin
(31.7)
(50.4)
(18.6)
(13.8)
(8.9)
EBIT margin
(20.9)
151.7
69.4
49.5
55.8
Pre-tax margin
(96.6)
149.8
517.3
358.7
391.3
Net margin
(95.2)
149.3
516.3
358.0
390.5
(18.0)
Cash flow statement
Year-end 31 Dec (HK$ mn)
EBIT
Depr./amort.
Change in working capital
Other cashflow (inc. provision spend)
Investment Income/FX adjustment
2004A
2005A
2006E
2007E
2008E
(31.9)
213.9
116.5
99.7
136.1
5.3
5.7
16.8
17.1
17.5
16.0
(17.7)
(69.7)
(8.6)
(10.8)
(28.7)
(293.2)
(167.8)
(148.6)
(180.2)
0.0
0.0
0.0
0.0
0.0
Cash tax
(3.8)
0.3
3.3
1.7
1.4
Net interest expense (P&L)
12.7
2.9
8.0
2.0
(3.7)
(35.5)
(91.7)
(107.6)
(42.1)
(38.8)
26.8
38.9
4.2
5.0
6.1
Decrease (incr.) in investments
(38.2)
(3.6)
0.0
0.0
0.0
Cash flow from investments
(11.4)
35.3
4.2
5.0
6.1
-
-
-
-
-
Dividends
0.0
0.0
0.0
0.0
0.0
Share capital
0.0
155.4
432.2
0.0
0.0
3.3
202.3
563.8
1,150.6
4.9
(33.6)
227.8
876.2
1,101.5
(36.3)
Operating cash flow
Capex
Preferred Dividends
Adjustment factor
Net chge in cash & cash equiv.
Margins (%)
ROE analysis (%)
EBIT margin (%)
(39.7)
(56.2)
(30.6)
(24.2)
Asset turnover (x)
0.1
0.1
0.0
0.0
0.0
Interest burden (x)
2.4
(2.7)
(16.9)
(14.8)
(21.7)
Tax burden (x)
1.0
1.0
1.0
1.0
1.0
Financial leverage (x)
1.2
1.1
1.0
1.0
1.0
(8.9)
10.3
25.9
17.8
19.0
ROE (%)
Liquidity ratios
Net debt/equity (%)
11.1
(2.3)
(9.5)
(22.0)
(33.3)
Interest coverage ratio (x)
(3.8)
(24.4)
(3.9)
(13.6)
5.8
Source: Company data, Credit Suisse estimates
Source: Company data, Credit Suisse estimates
How to Spend Your Lai See
27
22 February 2007
Asia Pacific / Malaysia
Forest Products
Evergreen Fibreboard Bhd (EVGN.KL /
EVF MK)
Rating
OUTPERFORM*
Price (15 Feb 07)
1.32 (RM )
Target price
2.00 (RM )¹
Chg to TP (%)
51.5
Mkt cap (RM mn)
633.60 (US$ 181.24)
Enterprise value (RM mn)
746.78
Number of shares (mn)
480.00
Free float (%)
50.00
52-week price range
1.32 - 0.80
* Stock ratings are relative to the relevant country index
¹ Target Price is for 12 months
Research Analysts
Hon Sze Leong
603 2723 2086
[email protected]
Green for go!
■ Event. Global medium-density fibreboard (MDF) prices have risen 24% YoY,
pulled up by rising plywood prices for which MDF is the closest substitute.
The rise in plywood prices is the result of global demand exceeding tropical
timber resources, which are constrained by environmentally issues. MDF,
being reconstituted plantation wood, is an environmental friendly and longerterm solution to tropical timber plywood.
■ View. Evergreen Fibreboard, with a net gearing of only 3%, is on an
acquisition and expansion drive to become one of the top ten MDF players in
the world. It has recently announced the acquisition of a Malaysian
competitor that should add 14% to earnings from FY07E onwards, and we
expect more corporate developments to unfold over the course of 2007.
These should include investments upstream to become more cost-efficient
and regional expansion.
■ Catalyst. The release of quarterly financial results in 2007, which should
convince the market that Evergreen can deliver the profits we are forecasting.
We are projecting EPS growth of 31% in FY07 and 35% in FY08, which are
10% and 20% above consensus, respectively. Another catalyst would be the
announcement of corporate developments that are earnings accretive.
■ Valuation: Our target price of RM2.00 per share values Evergreen at an
FY07E P/E of 12x or a PEG ratio of only 0.4x, based on its projected
average EPS growth of 33% p.a. over the next two years.
Share price performance
2
1.5
1
0.5
0
Mar-05
Jul-05 Nov-05 Mar-06
Price
Jul-06 Nov-06
Price Relative
The price relative chart measures performance against the
KUALA LUMPUR COMPOSITE index which closed at
1258.63 on 15/02/07
On 15/02/07 the spot exchange rate was RM 3.50/US$1
Performance over
Absolute (%)
Relative (%)
1M
6.5
-4.6
3M
9.1
-10.9
12M
48.3
9.3
Financial and valuation metrics
Year
Revenue (RM mn)
EBITDA (RM mn)
EBIT (RM mn)
Net income (RM mn)
EPS (CS adj., RM )
- change from prev. EPS (%)
- consensus EPS
EPS growth (%)
P/E (x)
Dividend yield (%)
EV/EBITDA (x)
P/B (x)
ROE (%)
Net debt/equity (%)
12/06A
528.1
90.2
67.0
59.8
0.12
n.a.
n.a.
9.8
10.6
3.0
7.2
1.5
15.0
2.6
12/07E
701.6
129.8
94.8
78.3
0.16
0.0
0.15
30.9
8.1
6.2
5.8
1.4
17.9
23.3
12/08E
811.3
168.7
133.7
105.4
0.22
0.0
0.18
34.6
6.0
8.3
4.0
1.2
21.8
6.0
12/09E
905.5
193.1
158.8
126.9
0.26
0.0
20.4
5.0
10.0
3.0
1.1
23.4
net cash
Source: Company data, Thomson Financial Datastream, Credit Suisse estimates
How to Spend Your Lai See
28
22 February 2007
Key financial data
Key earnings drivers
Year-end 31 Dec
Company description
2005A
2006E
2007E
2008E
2009E
Capacity (cu m p.a.)
748,000- 748,000- 1,116,000- 1,116,000- 1,116,000-
Production (cu m p.a.)
550,958- 652,000-
MDF avg selling price (US$/cu m)
Rubberwood cost (RM/t)
Glue cost (RM/t)
768,800-
899,400- 1,009,400-
219-
229-
268-
265-
90-
113-
110-
110-
264110-
1093-
1142-
1300-
1250-
1250-
Profit and loss
Year-end 31 Dec (RM mn)
Evergreen Fibreboard Bhd. manufactures medium density fiberboard
(MDF), knocked-down wooden furniture, and doors. The company,
through its subsidiaries, also manufactures particle board and MDF
and laminates MDF, particleboard, and plywood.
Balance sheet
2005A
2006A
2007E
2008E
2009E
Net sales
457.5
528.1
701.6
811.3
905.5
Cash and ST investments
Cost of goods sold
318.3
373.9
515.0
580.1
643.7
Gross profit
139.2
154.2
186.6
231.2
261.8
-
-
-
-
-
54.3
67.0
94.8
133.7
158.8
Operating costs
Operating profit
Non-operating inc./(exp.)
-
-
-
-
-
54.3
67.0
94.8
133.7
158.8
2.9
2.5
3.1
4.4
(0.5)
-
-
-
-
-
Pre-tax profit
54.1
68.6
94.7
132.3
162.3
Taxes
(4.9)
3.3
9.0
14.9
18.7
Minorities
(4.5)
(5.5)
(7.4)
(12.0)
Net profit
54.5
59.8
78.3
Net profit ex. excep.
54.5
59.8
EPS
0.11
0.12
EBIT
Interest/expense
Exceptionals
Net sales
2008E
2009E
(50.5)
25.7
108.1
Receivables
49.1
63.6
86.1
87.0
106.2
Inventory
50.4
48.1
80.5
64.0
96.2
Other current assets
21.3
21.3
21.3
21.3
21.3
Total current assets
238.5
178.1
137.3
197.9
331.7
Net fixed assets
263.0
374.8
394.8
379.8
365.5
18.4
18.4
18.4
18.4
18.4
-
-
-
-
-
Total LT assets
281.4
393.3
413.2
398.2
383.9
Total assets
Other assets
Assoc. & other LT invest.
571.4
550.6
596.2
715.6
13.1
13.1
13.1
13.1
(16.7)
Payables
28.0
37.8
48.2
48.5
58.7
105.4
126.9
Other current liabilities
21.3
22.4
(47.9)
(55.3)
(9.5)
78.3
105.4
126.9
Total current liabilities
62.4
73.3
13.3
6.2
62.2
0.16
0.22
0.26
Long-term debt
43.1
43.1
43.1
43.1
43.1
Other liabilities
16.0
16.0
16.0
16.0
16.0
Preferred stock
-
-
-
-
-
Total liabilities
121.5
132.4
72.5
65.4
121.3
Shareholders funds
398.4
439.0
478.1
530.8
594.3
Total liabilities and equity
519.9
571.4
550.6
596.2
715.6
2005A
2006A
2007E
2008E
2009E
2005A
2006A
2007E
2008E
2009E
100
100
100
100
70
71
73
72
71
Gross profit
30
29
27
28
29
Non-operating inc./(exp.)
2007E
45.2
13.1
100
Operating profit
2006A
117.7
519.9
Cost of goods sold
Operating costs
2005A
Short-term debt
Profit and loss common statement
Year-end 31 Dec (%)
Year-end 31 Dec (RM mn)
Key ratios and valuation
-
-
-
-
-
12
13
14
16
18
Year-end 31 Dec
-
-
-
-
-
Valuation ratios
12
13
14
16
18
P/E (x)
11.6
10.6
8.1
6.0
5.0
Interest/expense
1
0
0
1
(0)
EV/sales (x)
1.3
1.2
1.1
0.8
0.6
Exceptionals
-
-
-
-
-
EV/EBITDA (x)
7.3
7.2
5.8
4.0
3.0
Pre-tax profit
12
13
13
16
18
P/BVPS (x)
1.7
1.5
1.4
1.2
1.1
Taxes
(1)
1
1
2
2
Growth (%)
Minorities
(1)
(1)
(1)
(1)
(2)
Sales (%)
17.7
15.4
32.8
15.6
11.6
Net profit
12
11
11
13
14
EBIT (%)
(12.6)
23.5
41.4
41.0
18.8
Net profit ex. excep.
12
11
11
13
14
Net profit (%)
21.1
9.8
30.9
34.6
20.4
EPS (%)
21.1
9.8
30.9
34.6
20.4
EBITDA margin
17.3
17.1
18.5
20.8
21.3
EBIT margin
11.9
12.7
13.5
16.5
17.5
Pre-tax margin
11.8
13.0
13.5
16.3
17.9
Net margin
11.9
11.3
11.2
13.0
14.0
EBIT margin (%)
11.9
12.7
13.5
16.5
17.5
Asset turnover (x)
0.9
0.9
1.3
1.4
1.3
Interest burden (x)
1.0
1.0
1.0
1.0
1.0
Tax burden (x)
1.0
0.9
0.8
0.8
0.8
Financial leverage (x)
1.3
1.3
1.2
1.1
1.2
17.2
15.0
17.9
21.8
23.4
(16.3)
2.6
23.3
6.0
(9.0)
27.7
35.4
41.2
38.3
(368.1)
EBIT
Cash flow statement
Year-end 31 Dec (RM mn)
2005A
2006A
2007E
2008E
2009E
EBIT
54.3
67.0
94.8
133.7
158.8
Depr./amort.
24.8
23.2
35.0
35.0
34.3
Change in working capital
26.3
4.7
12.2
0.6
9.0
-
-
-
-
-
Investment Income/FX adjustment
2.1
2.0
0.0
0.0
0.0
Cash tax
1.2
3.3
9.0
14.9
18.7
Net interest expense (P&L)
2.9
2.5
3.1
4.4
(0.5)
Operating cash flow
50.9
81.7
105.4
148.9
165.9
Capex
36.3
135.0
55.0
20.0
20.0
(12.2)
0.0
(107.0)
0.0
0.0
24.2
135.0
(52.0)
20.0
20.0
-
-
-
-
-
39.6
19.2
39.1
52.7
63.5
Other cashflow (inc. provision spend)
Decrease (incr.) in investments
Cash flow from investments
Preferred Dividends
Dividends
Share capital
Adjustment factor
Net chge in cash & cash equiv.
-
-
-
-
-
109.1
2.5
3.1
4.4
(0.5)
69.0
(72.5)
(95.7)
76.2
82.4
Margins (%)
ROE analysis (%)
ROE (%)
Liquidity ratios
Net debt/equity (%)
Interest coverage ratio (x)
Source: Company data, Credit Suisse estimates
Source: Company data, Credit Suisse estimates
How to Spend Your Lai See
29
22 February 2007
Asia Pacific / Singapore
Internet & Catalog Retail
Gems TV Holdings Ltd
(GEMS.SI / GEMS SP)
Rating
OUTPERFORM* [V]
Price (15 Feb 07)
1.50 (S$)
Target price
1.94 (S$)¹
Chg to TP (%)
29.2
Mkt cap (S$ mn)
1,545 (US$ 1,008)
Enterprise value (US$ mn)
854
Number of shares (mn)
1,030.30
Free float (%)
31.90
52-week price range
1.55 - 1.17
* Stock ratings are relative to the relevant country index
¹ Target Price is for 12 months
Research Analysts
Clarice Khoo
65 6212 3746
[email protected]
Bradley Burch
65 6212 3007
[email protected]
Rock star
■ Event. We initiated coverage of Gems TV on 11 January 2007, and we
believe strongly in the growth prospects of this company. Its interesting and
scaleable integrated business model sets it apart from its ‘peers’, in our view.
Within its first year of integration, it achieved a net profit of US$29 mn
(+441%). Driven mainly by its US expansion, we expect a two-year net profit
CAGR of 61%.
■ View. Gems’s business model of an integrated manufacturer and a TV home
shopping retailer of coloured gemstone jewellery differentiates the company
from other home shopping channels and ‘bricks and mortar’ retailers with the
strong value proposition it offers to end-consumers. This is the result of its
upstream integration (from jewellery manufacturing in Thailand to TV home
shopping retailing in the UK and recently, the US and Germany), jewellery
specialisation and an interactive selling format (reverse auction). With the
scaleability of the low-cost manufacturing base in Thailand, it capitalises on
its first-mover advantage to expand into new markets, such as the US, which
we estimate will contribute over 50% of total core revenue in FY08E.
■ Catalyst. We see further growth in incremental data on the expansion into
new markets, especially the US since its launch in November 2006. There is
the possibility of contributions from Japan and China (sales not in forecasts).
■ Valuation. Our (June) FY08E target price of S$1.94 is based on 17x P/E,
the lower of its two ‘peers’ – TV home shopping players and small integrated
gemstone players. In arriving at this target price for Gems TV, we looked at
several comparable industries, as there are no direct comparable companies.
The average two-year forward P/E for small integrated gemstone players
was 17.6x; it was 17.2x for TV home shopping players and 22.2x for
retail/online jewellery players. However, all groups were growing slower than
we believe Gems TV will. We believe that at 17x it represents an attractive
risk-reward profile, given Gems’ short history and execution risks related to
its expansion plans. We maintain our OUTPERFORM rating.
Share price performance
2
1.8
1.6
1.4
1.2
1
Nov-06
Price
Price Relative
The price relative chart measures performance against the
SINGAPORE STRAITS TIMES(NEW) index which closed at
3252.49 on 15/02/07
On 15/02/07 the spot exchange rate was S$1.53/US$1
Performance over
Absolute (%)
Relative (%)
1M
11.9
4.5
3M
11.1
-5.1
12M
—
—
Financial and valuation metrics
Year
Revenue (US$ mn)
EBITDA (US$ mn)
EBIT (US$ mn)
Net income (US$ mn)
EPS (CS adj., US$)
- change from prev. EPS (%)
- consensus EPS
EPS growth (%)
P/E (x)
Dividend yield (%)
EV/EBITDA (x)
P/B (x)
ROE (%)
Net debt/equity (%)
6/06A
137.6
43.3
41.4
28.8
0.03
n.a.
n.a.
172.9
28.0
8.7
22.9
22.1
114.1
net cash
6/07E
230.5
46.2
43.5
32.7
0.03
0.0
0.03
-2.6
28.7
1.0
18.5
5.0
27.3
net cash
6/08E
381.9
106.8
99.1
74.3
0.07
0.0
0.06
111.9
13.6
2.2
7.4
3.8
31.6
net cash
6/09E
423.2
122.1
114.5
86.8
0.08
0.0
0.07
16.8
11.6
2.6
6.0
3.0
28.9
net cash
Source: Company data, Thomson Financial Datastream, Credit Suisse estimates
How to Spend Your Lai See
30
22 February 2007
Key financial data
Key earnings drivers
Year-end 30 Jun
UK ASP (S$)
US ASP (S$)
Company description
2005A
2006A
2007E
2008E
2009E
52.3
83.5
101.1
101.1
101.1
Gems TV is an integrated manufacturer & TV home shopping retailer of
coloured gemstone jewellery. It is on TV networks in the UK, US &
Germany and has plans for Japan & China
0.0
0.0
120.0
120.0
120.0
UK - No. of items sold ('000s)
66.3
1,485.0
1,331.2
1,461.6
1,589.3
US - No. of items sold ('000s)
0.0
0.0
708.0
1,674.6
1,892.0
2005A
2006A
2007E
2008E
2009E
2005A
2006A
2007E
2008E
2009E
Net sales
39.3
137.6
230.5
381.9
423.2
Cash and ST investments
4.9
15.7
152.8
212.1
274.3
Cost of goods sold
25.2
66.2
123.4
191.1
211.3
Receivables
1.6
0.5
6.0
10.0
11.0
Gross profit
14.1
71.4
107.1
190.8
211.9
Inventory
16.9
34.2
70.7
78.2
85.1
Operating costs
7.2
32.7
63.5
91.7
97.3
Other current assets
1.1
3.1
3.1
3.1
3.1
Operating profit
7.6
41.4
43.5
99.1
114.5
Total current assets
24.6
53.5
232.6
303.4
373.6
Net fixed assets
6.6
6.9
11.0
23.9
23.2
Other assets
6.6
8.1
8.5
8.8
9.1
-
-
-
-
-
Total LT assets
13.3
15.0
19.5
32.7
32.3
Total assets
405.9
Balance sheet
Profit and loss
Year-end 30 Jun (US$ mn)
Non-operating inc./(exp.)
Year-end 30 Jun (US$ mn)
-
-
-
-
-
7.6
41.4
43.5
99.1
114.5
(0.0)
(0.3)
(3.2)
(7.1)
(9.4)
-
-
-
-
-
Pre-tax profit
7.6
41.7
46.8
106.2
124.0
Taxes
2.2
12.9
14.0
31.9
37.2
Minorities
-
-
-
-
-
Net profit
5.3
28.8
32.7
74.3
86.8
Other current liabilities
Net profit ex. excep.
5.3
28.8
32.7
74.3
86.8
Total current liabilities
0.01
0.03
0.03
0.07
0.08
EBIT
Interest/expense
Exceptionals
EPS
Profit and loss common statement
Year-end 30 Jun (%)
Net sales
2005A
2006A
2007E
2008E
2009E
Assoc. & other LT invest.
37.8
68.5
252.1
336.1
Short-term debt
0.0
0.0
0.0
0.0
0.0
Payables
4.5
4.8
15.2
23.6
26.1
11.9
9.8
16.3
27.4
30.3
20.2
30.2
47.0
66.5
71.9
Long-term debt
1.1
1.2
1.2
1.2
1.2
Other liabilities
2.5
0.6
0.6
0.6
0.6
Preferred stock
-
-
-
-
-
Total liabilities
23.9
31.9
48.8
68.3
73.7
Shareholders funds
14.0
36.5
203.3
267.8
332.3
Total liabilities and equity
37.8
68.5
252.1
336.1
405.9
2005A
2006A
2007E
2008E
2009E
100
100
100
100
100
Cost of goods sold
64
48
54
50
50
Gross profit
36
52
46
50
50
Operating costs
18
24
28
24
23
Key ratios and valuation
Operating profit
19
30
19
26
27
Year-end 30 Jun
-
-
-
-
-
Valuation ratios
Non-operating inc./(exp.)
EBIT
19
30
19
26
27
P/E (x)
76.2
27.9
28.7
13.5
11.6
Interest/expense
(0)
(0)
(1)
(2)
(2)
EV/sales (x)
25.5
7.2
3.7
2.1
1.7
-
-
-
-
-
124.1
22.9
18.5
7.4
6.0
19
30
20
28
29
P/BVPS (x)
57.6
22.0
4.9
3.8
3.0
6
9
6
8
9
Growth (%)
Exceptionals
Pre-tax profit
Taxes
EV/EBITDA (x)
Minorities
-
-
-
-
-
Sales (%)
174.3
250.4
67.6
65.7
10.8
Net profit
14
21
14
19
21
EBIT (%)
nm
448.0
5.2
127.6
15.6
Net profit ex. excep.
14
21
14
19
21
Net profit (%)
nm
441.4
13.7
127.0
16.8
EPS (%)
nm
172.9
(2.6)
111.9
16.8
EBITDA margin
20.6
31.5
20.0
28.0
28.9
EBIT margin
19.2
30.1
18.9
25.9
27.1
Pre-tax margin
19.3
30.3
20.3
27.8
29.3
Net margin
13.6
20.9
14.2
19.5
20.5
EBIT margin (%)
19.8
32.3
19.9
27.2
28.4
Asset turnover (x)
1.5
2.4
1.4
1.2
1.1
Interest burden (x)
1.0
1.0
1.1
1.1
1.1
Tax burden (x)
0.7
0.7
0.7
0.7
0.7
Financial leverage (x)
2.2
2.1
1.3
1.2
1.2
46.6
114.1
27.3
31.6
28.9
(25.6)
(39.5)
(74.5)
(78.7)
(82.2)
-
-
(14.3)
(15.0)
(12.9)
Cash flow statement
Year-end 30 Jun (US$ mn)
2005A
2006A
2007E
2008E
2009E
EBIT
7.6
41.4
43.5
99.1
114.5
Depr./amort.
0.5
1.9
2.6
7.7
7.6
(4.5)
(14.3)
(30.0)
(0.5)
(4.9)
Other cashflow (inc. provision spend)
0.9
1.6
11.3
22.7
21.1
Investment Income/FX adjustment
0.0
0.0
0.0
0.0
0.0
Cash tax
0.3
2.8
14.0
31.9
37.2
Net interest expense (P&L)
0.0
0.3
3.2
7.1
9.4
Operating cash flow
4.2
27.5
10.2
90.1
91.7
Capex
0.6
1.7
6.6
20.4
6.6
-
-
-
-
-
0.6
1.7
6.6
20.4
6.6
-
-
-
-
-
2.9
13.0
0.0
9.8
22.3
-
-
-
-
-
Adjustment factor
3.6
(5.1)
133.4
(0.6)
(0.6)
Net chge in cash & cash equiv.
4.2
7.7
137.1
59.3
62.2
Change in working capital
Decrease (incr.) in investments
Cash flow from investments
Preferred Dividends
Dividends
Share capital
Margins (%)
ROE analysis (%)
ROE (%)
Liquidity ratios
Net debt/equity (%)
Interest coverage ratio (x)
Source: Company data, Credit Suisse estimates
Source: Company data, Credit Suisse estimates
How to Spend Your Lai See
31
22 February 2007
Asia Pacific / Taiwan
Small Cap Companies
Huaku Construction Corp.
(2548.TW / 2548 TT)
Rating
OUTPERFORM*
Price (15 Feb 07)
63.30 (NT$)
Target price
99.00 (NT$)¹
Chg to TP (%)
56.4
Mkt cap (NT$ mn) 10,848.61 (US$ 329.69)
Enterprise value (NT$ mn)
13,983.47
Number of shares (mn)
171.38
Free float (%)
70.00
52-week price range
81.7 - 31.6
* Stock ratings are relative to the relevant country index
¹ Target Price is for 12 months
Research Analysts
Sidney Yeh
886 2 2715 6368
[email protected]
Vivian Jang
8862 2715 6386
[email protected]
Oversold
■ More diverse project locations. Huaku plans to launch five projects, with
an estimated value of NT$11.9 bn in 1H07, compared with NT$3.9 bn in
2005 and NT$10.0 bn in 2006, as Huaku remains very positive on Taipei
City property. Unlike its strategy in 2006, with projects concentrated in the
Neihu area, these projects are of diverse locations in Taipei City. We are
positive on this strategy, given the increasing supply in the Neihu area.
■ Project margin to trend up. Contrary to the street’s worry about margin
decline for new projects launched in 2007, we estimate that blended project
margins will climb to 36.5% this year, up from 31.9% in 2005 and 34.4% in
2006. Of the five projects, the margins range from 20-50%, in our modelling,
compared with the company’s guidance of 20-35%. All these projects
launched this year would filter into earnings for 2007, 2008 and 2009.
■ Forecast risk is on the upside. We maintain with our earnings forecasts for
2007 and 2008. Consensus forecasts on Huaku seem low to us. Our current
2007 and 2008 earnings forecasts are 74% and 46%, respectively, locked in
by projects launched in 2006. We believe the forecast risk is on the upside,
rather than on the downside, as we have not yet factored in the higher
project margin assumption for projects lunched in 1H07.
■ Very attractive valuation. After the recent panic selling, Huaku now trades
at very cheap valuations of 5.4x FY07E and 4.3x FY08E EPS. Given the
street’s lower expectations, the high percentage of earnings locked in and its
cheap valuation, we strongly believe that this is a very good entry point to
this quality developer.
Share price performance
80
60
40
20
Feb-05 Jun-05 Oct-05
Price
Feb-06 Jun-06 Oct-06
Price Relative
The price relative chart measures performance against the
TAIWAN SE WEIGHTED index which closed at 7809.45 on
15/02/07
On 15/02/07 the spot exchange rate was NT$32.91/US$1
Performance over
Absolute (%)
Relative (%)
1M
4.8
4.5
3M
-15.9
-22.1
12M
85.9
57.1
Financial and valuation metrics
Year
Revenue (NT$ mn)
EBITDA (NT$ mn)
EBIT (NT$ mn)
Net income (NT$ mn)
EPS (CS adj., NT$)
- change from prev. EPS (%)
- consensus EPS
EPS growth (%)
P/E (x)
Dividend yield (%)
EV/EBITDA (x)
P/B (x)
ROE (%)
Net debt/equity (%)
12/05A
5,863.7
1,095.6
1,090.9
1,101.2
7.07
n.a.
n.a.
147.3
9.0
5.7
12.4
3.1
34.4
85.4
12/06E
6,386.2
1,234.4
1,233.8
1,206.3
6.98
0.0
7.11
-1.3
9.1
5.6
11.3
2.9
31.8
82.5
12/07E
8,449.3
2,184.3
2,183.7
2,013.1
11.64
0.0
7.85
66.9
5.4
8.5
6.7
2.1
39.2
73.4
12/08E
10,871.7
2,708.0
2,707.4
2,519.9
14.58
0.0
9.57
25.2
4.3
8.7
5.4
1.7
38.6
56.7
Source: Company data, Thomson Financial Datastream, Credit Suisse estimates
How to Spend Your Lai See
32
22 February 2007
Key financial data
Company description
Huaku Construction Corporation builds, sells and leases commercial
and residential buildings which are constructed by independent
contractors.
Balance sheet
Year-end 31 Dec (NT$ mn)
2004A
2005A
2006E
2007E
2008E
Cash and ST investments
153
208
406
375
444
Receivables
634
123
35
46
60
6,182
7,546
9,234
11,698
12,260
Inventory
Profit and loss
Year-end 31 Dec (NT$ mn)
Other current assets
118
341
373
446
533
7,087
8,217
10,049
12,565
13,297
2004A
2005A
2006E
2007E
2008E
Total current assets
Net sales
2,318
5,864
6,386
8,449
10,872
Net fixed assets
10
7
6
6
5
Cost of goods sold
1,604
4,368
4,649
5,597
7,363
Other assets
30
37
45
54
64
Gross profit
714
1,496
1,737
2,853
3,508
Assoc. & other LT invest.
230
220
226
226
226
Operating costs
213
405
503
669
801
Total LT assets
270
264
277
285
295
Operating profit
501
1,091
1,234
2,184
2,707
Total assets
7,357
8,481
10,325
12,850
13,592
Non-operating inc./(exp.)
(30)
(31)
23
(35)
(9)
Short-term debt
2,523
2,943
3,543
4,143
4,143
EBIT
501
1,091
1,234
2,184
2,707
268
429
191
230
303
16
1
1
40
60
Other current liabilities
2,131
1,898
2,782
3,334
2,614
Total current liabilities
7,059
Interest/expense
Exceptionals
Pre-tax profit
Taxes
Payables
-
-
-
-
-
4,922
5,270
6,516
7,707
428
1,111
1,261
2,109
2,638
Long-term debt
285
0
0
0
0
40
10
55
96
118
Other liabilities
18
11
11
11
11
Minorities
0
0
-
-
-
Preferred stock
-
-
-
-
-
Net profit
388
1,101
1,206
2,013
2,520
Total liabilities
5,225
5,281
6,527
7,717
7,070
Net profit ex. excep.
388
1,101
1,206
2,013
2,520
Shareholders’ funds
2,131
3,200
3,799
5,132
6,522
EPS
2.9
7.1
7.0
11.6
14.6
Total liabilities and equity
7,357
8,481
10,325
12,850
13,592
2004A
2005A
2006E
2007E
2008E
Year-end 31 Dec
2004A
2005A
2006E
2007E
2008E
100
100
100
100
100
Valuation ratios
Cost of goods sold
69
74
73
66
68
P/E (x)
22.1
9.0
9.1
5.4
4.3
Gross profit
31
26
27
34
32
EV/sales (x)
5.8
2.3
2.2
1.7
1.3
Operating costs
9
7
8
8
7
26.2
12.4
11.3
6.7
5.4
Operating profit
22
19
19
26
25
P/BVPS (x)
4.0
3.1
2.9
2.1
1.7
Non-operating inc./(exp.)
(1)
(1)
0
(0)
(0)
Growth (%)
EBIT
Profit and loss common statement
Year-end 31 Dec (%)
Net sales
Key ratios and valuation
EV/EBITDA (x)
22
19
19
26
25
Sales (%)
41.7
153.0
8.9
32.3
28.7
Interest/expense
1
0
0
0
1
EBIT (%)
8,839.5
117.9
13.1
77.0
24.0
Exceptionals
-
-
-
-
-
Net profit (%)
2,611.6
183.6
9.5
66.9
25.2
18
19
20
25
24
EPS (%)
2,147.6
147.3
(1.3)
66.9
25.2
2
0
1
1
1
Margins (%)
Pre-tax profit
Taxes
Minorities
0
0
-
-
-
EBITDA margin
22.3
18.7
19.3
25.9
24.9
Net profit
17
19
19
24
23
EBIT margin
21.6
18.6
19.3
25.8
24.9
Net profit ex. excep.
17
19
19
24
23
Pre-tax margin
18.5
18.9
19.8
25.0
24.3
Net margin
16.7
18.8
18.9
23.8
23.2
EBIT margin (%)
21.6
18.6
19.3
25.8
24.9
Asset turnover (x)
0.3
0.7
0.6
0.7
0.8
Interest burden (x)
0.9
1.0
1.0
1.0
1.0
Tax burden (x)
0.9
1.0
1.0
1.0
1.0
Financial leverage (x)
3.5
2.7
2.7
2.5
2.1
18.2
34.4
31.8
39.2
38.6
Cash flow statement
Year-end 31 Dec (NT$ mn)
2004A
2005A
2006E
2007E
2008E
501
1,091
1,234
2,184
2,707
15
5
1
1
1
(5,263)
(1,987)
(961)
(1,890)
(1,230)
2,957
853
(68)
(245)
(278)
(26)
53
6
0
0
Cash tax
-
-
-
-
-
Net interest expense (P&L)
-
-
-
-
-
(1,816)
13
212
48
1,200
1
0
0
0
0
Decrease (incr.) in investments
26
(7)
0
0
0
Cash flow from investments
27
(7)
0
0
0
-
-
-
-
-
23
297
561
611
1,028
EBIT
Depr./amort.
Change in working capital
Other cash flow (inc. provision spend)
Investment Income/FX adjustment
Operating cash flow
Capex
Preferred dividends
Dividends
Share capital
Adjustment factor
Net chg. in cash & cash equiv.
0
0
0
0
0
1,937
384
553
531
(103)
71
107
204
(31)
69
ROE analysis (%)
ROE (%)
Liquidity ratios
Net debt/equity (%)
Interest coverage ratio (x)
124.5
85.4
82.5
73.4
56.7
32.0
756.6
1,409.3
54.6
45.1
Source: Company data, Credit Suisse estimates
Source: Company data, Credit Suisse estimates
How to Spend Your Lai See
33
22 February 2007
Asia Pacific / Thailand
Real Estate Management & Development
Siam Future Development PCL
(SF.BK / SF TB)
Rating
OUTPERFORM*
Price (15 Feb 07)
8.80 (Bt)
Target price
13.50 (Bt)¹
Chg to TP (%)
53.4
Mkt cap (Bt mn)
4,478.69 (US$ 133.91)
Enterprise value (Bt mn)
5,429.88
Number of shares (mn)
508.94
Free float (%)
37.84
52-week price range
10.70 - 5.50
* Stock ratings are relative to the relevant country index
¹ Target Price is for 12 months
Research Analysts
Sai Sarinee Sernsukskul
662 614 6218
[email protected]
Siriporn Sothikul, CFA
662 614 6217
[email protected]
Defensive with growth option
■ More mall openings. We believe that Siam Future is set for another strong
year, driven by the opening of its Esplanade Mall (in December 2006) and
Pattaya Mall (in August 2007). As a result, average retail space is expected
to rise 74% YoY in 2007. With the openings of Kaset Navamin and
Ratchayothin in 2008, average retail space will rise a further 12% YoY.
■ Bookings good so far. According to management, the Esplanade is now
95% booked and the Kaset Navamin (an outdoor life style mall) project has
secured three anchor tenants: Major Cineplex (MAJO.BK, Bt16.00, not
rated), Villa Supermarket and Cementhai Showroom, which take up half of
its lettable space.
■ Revised up earnings. We recently revised up our 2007 and 2008 EPS
forecasts by 13% and 43%, respectively, to factor in the contributions from
new malls. Due to the dilution from the 2006 rights issue, 2007E EPS would
effectively grow just 0.4% YoY. However, we are still 22% and 12% above
consensus estimates for 2007 and 2008, respectively.
■ Defensive with growth option. Our target price is Bt13.5 (53% potential
upside), taking into account the contributions from new malls. We maintain
an OUTPERFORM rating, due to the company’s ‘utility-like’ business model
(through back-to-back, long-term leases to tenants and long-term leases
from landowners) and the ‘growth option’. In addition, management indicated
that there are likely to be more projects in the pipeline, which we have not
factored into our target price.
Share price performance
11
10
9
8
7
6
5
Feb-05 Jun-05 Oct-05
Price
Feb-06 Jun-06 Oct-06
Price Relative
The price relative chart measures performance against the
BANGKOK S.E.T. index which closed at 693.86 on 15/02/07
On 15/02/07 the spot exchange rate was Bt33.45/US$1
Performance over
Absolute (%)
Relative (%)
1M
14.3
8.1
3M
-3.3
2.3
12M
37.5
43.8
Financial and valuation metrics
Year
Revenue (Bt mn)
EBITDA (Bt mn)
EBIT (Bt mn)
Net income (Bt mn)
EPS (CS adj., Bt)
- change from prev. EPS (%)
- consensus EPS
EPS growth (%)
P/E (x)
Dividend yield (%)
EV/EBITDA (x)
ROE (%)
Net debt/equity (%)
Current est. NAV (Bt)
Disc./prem. to current NAV (%)
12/05A
439.8
204.5
155.1
106.9
0.26
n.a.
n.a.
-60.6
34.1
1.1
28.5
12.2
150.4
—
—
12/06E
1,636.5
768.6
428.0
419.1
0.93
0.0
0.91
258.6
9.5
4.2
7.1
31.9
55.0
13.5
-34.7
12/07E
1,764.2
972.8
638.0
473.6
0.93
0.0
0.76
0.4
9.5
4.2
6.5
22.1
70.9
—
—
12/08E
1,660.5
846.9
639.8
365.6
0.72
0.0
0.64
-22.8
12.2
3.3
6.8
13.7
47.3
—
—
Source: Company data, Thomson Financial Datastream, Credit Suisse estimates
How to Spend Your Lai See
34
22 February 2007
Key financial data
Key earnings drivers
Year-end 30 Jun
Company description
2004A
2005A
2006E
2007E
2008E
21
24
27
29
30
Year-end rentable sq m
61,250
96,838
193,306
221,990
256,672
Effective rentable sq m
44,003
69,964
115,729
207,648
221,699
57
119
146
157
182
287
276
371
367
417
2004A
2005A
2006E
2007E
2008E
Year-end 31 Dec (Bt mn)
2004A
2005A
2006E
2007E
2008E
Net sales
615
440
1,637
1,764
1,661
Cash and ST investments
90
0
149
91
288
Cost of goods sold
139
248
826
799
800
Receivables
124
131
131
141
133
Gross profit
476
192
810
965
861
Inventory
0
0
0
0
0
Operating costs
60
73
148
164
196
Other current assets
20
51
0
0
0
Operating profit
415
120
662
801
665
Total current assets
234
182
280
233
421
1,384
2,874
3,680
5,377
5,271
44
108
232
487
474
8
2
2
2
2
Total LT assets
1,437
2,984
3,915
5,866
5,747
1,670
3,166
4,195
6,099
6,168
7
319
360
760
710
Payables
187
38
128
124
124
Ending no. of stores
Total land leased (rai)
Avg. rental rev./sq m/moth (ex. LPF)
Balance sheet
Profit and loss
Year-end 31 Dec (Bt mn)
Non-operating inc./(exp.)
Siam Future Dev. is a small mall developer located mostly in
Bangkok’s suburbs. The malls are mainly neighbourhood, lifestyle, or
convenience centres. The company does not normally own the land,
but leases it on a long-term basis. Currently, it has 27 completed mall
projects in hand.
7
35
25
25
25
423
155
687
826
690
(1)
(12)
(42)
(103)
(102)
0
0
0
0
0
Pre-tax profit
422
143
645
723
588
Total assets
Taxes
126
36
194
217
176
Short-term debt
Minorities
86
1
32
32
46
Net profit
210
106
419
474
366
Other current liabilities
173
343
373
407
425
Net profit ex. excep.
210
106
419
474
366
Total current liabilities
366
700
861
1,291
1,259
EPS
0.66
0.26
0.93
0.93
0.72
Long-term debt
0
1,030
740
1,140
890
Other liabilities
444
539
863
1,116
1,244
EBIT
Interest/expense
Exceptionals
Profit and loss common statement
Year-end 31 Dec (%)
Net sales
2004A
2005A
2006E
2007E
2008E
Net fixed assets
Other assets
Assoc. & other LT invest.
Preferred stock
0
0
0
0
0
Total liabilities
810
2,269
2,465
3,547
3,393
100
100
100
100
100
Cost of goods sold
23
56
50
45
48
Gross profit
77
44
50
55
52
Operating costs
10
16
9
9
12
Key ratios and valuation
Operating profit
68
27
40
45
40
Year-end 31 Dec
1
8
2
1
2
Valuation ratios
Non-operating inc./(exp.)
Shareholders funds
Total liabilities and equity
860
897
1,730
2,553
2,775
1,670
3,166
4,195
6,099
6,168
2004A
2005A
2006E
2007E
2008E
EBIT
69
35
42
47
42
P/E (x)
13.4
34.1
9.5
9.5
12.2
Interest/expense
(0)
(3)
(3)
(6)
(6)
EV/sales (x)
7.3
10.9
3.0
3.0
3.1
Exceptionals
0
0
0
0
0
EV/EBITDA (x)
9.8
23.5
6.3
5.4
6.1
Pre-tax profit
69
32
39
41
35
P/BVPS (x)
4.1
4.2
2.6
1.8
1.6
Taxes
21
8
12
12
11
Growth (%)
Minorities
14
0
2
2
3
Sales (%)
287.6
-28.5
272.1
7.8
-5.9
Net profit
34
24
26
27
22
EBIT (%)
851.1
-63.3
342.8
20.3
-16.4
Net profit ex. excep.
34
24
26
27
22
Net profit (%)
521.9
-49.2
292.0
13.0
-22.8
EPS (%)
204.1
-60.6
258.6
0.4
-22.8
EBITDA margin
74.2
46.5
47.0
55.1
51.0
EBIT margin
68.8
35.3
42.0
46.8
41.6
Pre-tax margin
68.7
32.5
39.4
41.0
35.4
Net margin
34.2
24.3
25.6
26.8
22.0
EBIT margin (%)
68.8
35.3
42.0
46.8
41.6
Asset turnover (x)
0.5
0.2
0.4
0.3
0.3
Interest burden (x)
1.0
0.9
0.9
0.9
0.9
Tax burden (x)
0.5
0.7
0.6
0.7
0.6
Financial leverage (x)
2.0
2.8
2.8
2.4
2.3
32.4
12.2
31.9
22.1
13.7
-9.7
150.4
55.0
70.9
47.3
723.5
12.7
16.0
7.9
6.6
Cash flow statement
Year-end 31 Dec (Bt mn)
2004A
2005A
2006E
2007E
2008E
210
107
419
474
366
34
49
82
147
156
Changes in oper. assets & liabilities
374
(20)
171
19
27
Cash flow from operations
618
137
460
273
375
(907)
(1,540)
(888)
(1,843)
(50)
16
6
0
0
0
(22)
(64)
8
0
0
0
0
32
537
46
Cash flow from investments
(912)
(1,597)
(847)
(1,306)
(4)
Increase (decrease) in ST debt
(36)
315
41
400
(50)
Increase (decrease) in LT debt
114
1,126
(252)
373
(277)
Capital increase
166
20
85
0
0
72
35
372
537
46
Dividend
(27)
(127)
(42)
(189)
(189)
Cash flow from financing
290
1,370
203
1,122
(470)
(5)
(90)
(184)
89
(99)
Net income
Depreciation and amortisation
Purchases of PP&E
Deposit with restriction
Other change in non-current assets
Adjust for Minorities in B/S
Capital adjustment
Net inc. (dec.) in cash & equivalents
Margins (%)
ROE analysis (%)
ROE (%)
Liquidity ratios
Net debt/equity (%)
Interest coverage ratio (x)
Source: Company data, Credit Suisse estimates
Source: Company data, Credit Suisse estimates
How to Spend Your Lai See
35
22 February 2007
How to Spend Your Lai See
36
22 February 2007
Companies Mentioned (Price as of 15 Feb 07)
Anhui Conch Cement Co. Ltd. (0914.HK, HK$24.75, OUTPERFORM, TP HK$30.00)
Bank of East Asia (0023.HK, HK$47.65, NEUTRAL, TP HK$42.40)
Boeing (BA, $91.71, OUTPERFORM, TP $104.00, MARKET WEIGHT)
CapitaLand (CATL.SI, S$7.40, UNDERPERFORM, TP S$5.78)
Cheung Kong Holdings (0001.HK, HK$102.50, OUTPERFORM, TP HK$109.73)
China Life Insurance Co. (2628.HK, HK$23.15, UNDERPERFORM, TP HK$16.50)
China Mobile Limited (0941.HK, HK$75.00, NEUTRAL, TP HK$71.30)
China Netcom Group Corp (0906.HK, HK$19.92, OUTPERFORM, TP HK$19.50)
China Shipping Container Lines (2866.HK, HK$3.01, OUTPERFORM, TP HK$3.20)
China Shipping Development (1138.HK, HK$11.64, OUTPERFORM, TP HK$12.60)
China Telecom (0728.HK, HK$3.70, OUTPERFORM, TP HK$4.20)
China Unicom (0762.HK, HK$10.40, NEUTRAL, TP HK$10.25)
Ciputra Surya Tbk PT (CTRS.JK, Rp950.00, OUTPERFORM [V], TP Rp1275.00)
CLP Holdings Limited (0002.HK, HK$58.80, OUTPERFORM, TP HK$69.00)
Dell, Inc. (DELL, $24.38, OUTPERFORM, TP $28.00, MARKET WEIGHT)
eSun Holdings Limited (0571.HK, HK$7.05, OUTPERFORM, TP HK$10.20)
Evergreen Fibreboard Bhd (EVGN.KL, RM1.32, OUTPERFORM, TP RM2.00)
Gems TV Holdings Ltd (GEMS.SI, S$1.50, OUTPERFORM [V], TP S$1.94)
Hang Lung Group (0010.HK, HK$26.65, OUTPERFORM, TP HK$33.89)
Hang Seng Bank (0011.HK, HK$111.30, OUTPERFORM, TP HK$123.00)
Hewlett-Packard (HPQ, $42.68, OUTPERFORM, TP $50.00, MARKET WEIGHT)
Hong Leong Asia (HLAA.SI, S$2.00, OUTPERFORM, TP S$2.58)
Huaku Construction Corp (2548.TW, NT$63.30, OUTPERFORM, TP NT$99.00)
Hutchison Whampoa (0013.HK, HK$79.45, OUTPERFORM, TP HK$97.00)
Industrial & Commercial Bank of China (1398.HK, HK$4.62, OUTPERFORM [V], TP HK$4.38)
Lenovo Group Ltd (0992.HK, HK$3.13, UNDERPERFORM, TP HK$2.72)
Lupin Ltd (LUPN.BO, Rs598.50, OUTPERFORM, TP Rs698.31)
Major Cineplex Group Pcl (MAJO.BK, Bt16.00, NOT RATED)
Melco (0200.HK, HK$15.66, OUTPERFORM [V], TP HK$26.10)
Melco PBL Entertainment Macau Limited (MPEL.OQ, $20.42, OUTPERFORM [V], TP $26.20)
MMI Holdings (MMIH.SI, S$1.48, Restricted)
Shanghai Electric Group Co., Ltd. (2727.HK, HK$4.07, OUTPERFORM, TP HK$5.00)
Siam Future Development PCL (SF.BK, Bt8.80, OUTPERFORM, TP Bt13.50)
Sunrise Bhd (SUNR.KL, RM2.21, NEUTRAL, TP RM2.45)
Telefonica (TEF.MC, Eu17.05, OUTPERFORM, TP Eu17.50, MARKET WEIGHT)
THE9 Ltd (NCTY.OQ, $38.86, OUTPERFORM [V], TP $42.00)
Total Access Communications (TACC.SI, $4.10, OUTPERFORM, TP $6.45)
Zhejiang Expressway Co Ltd (0576.HK, HK$6.12, OUTPERFORM, TP HK$7.00)
How to Spend Your Lai See
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22 February 2007
Disclosure Appendix
Important Global Disclosures
The analysts identified in this report each certify, with respect to the companies or securities that the
individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views
about all of the subject companies and securities and (2) no part of his or her compensation was, is or
will be directly or indirectly related to the specific recommendations or views expressed in this report.
The analyst(s) responsible for preparing this research report received compensation that is based upon
various factors including Credit Suisse's total revenues, a portion of which are generated by Credit
Suisse's investment banking activities.
Analysts’ stock ratings are defined as follows***:
Outperform: The stock’s total return is expected to exceed the industry average* by at least 10-15% (or
more, depending on perceived risk) over the next 12 months.
Neutral: The stock’s total return is expected to be in line with the industry average* (range of ±10%)
over the next 12 months.
Underperform**: The stock’s total return is expected to underperform the industry average* by 10-15%
or more over the next 12 months.
*The industry average refers to the average total return of the analyst's industry coverage universe
(except with respect to Asia/Pacific, Latin America and Emerging Markets, where stock ratings are
relative to the relevant country index, and Credit Suisse Small and Mid-Cap Advisor stocks, where
stock ratings are relative to the regional Credit Suisse Small and Mid-Cap Advisor investment
universe.
**In an effort to achieve a more balanced distribution of stock ratings, the Firm has requested that
analysts maintain at least 15% of their rated coverage universe as Underperform. This guideline is
subject to change depending on several factors, including general market conditions.
***For Australian and New Zealand stocks a 7.5% threshold replaces the 10% level in all three rating
definitions, with a required equity return overlay applied.
Restricted: In certain circumstances, Credit Suisse policy and/or applicable law and regulations
preclude certain types of communications, including an investment recommendation, during the course
of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.
Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 20% or
more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going
forward. All Credit Suisse Small and Mid-Cap Advisor stocks are automatically rated volatile. All IPO
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Analysts’ coverage universe weightings* are distinct from analysts’ stock
ratings and are based on the expected performance of an analyst’s coverage
universe** versus the relevant broad market benchmark***:
Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12
months.
Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the
next 12 months.
Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12
months.
*Credit Suisse Small and Mid-Cap Advisor stocks do not have coverage universe weightings.
**An analyst’s coverage universe consists of all companies covered by the analyst within the relevant
sector.
***The broad market benchmark is based on the expected return of the local market index (e.g., the S&P
500 in the U.S.) over the next 12 months.
Credit Suisse’s distribution of stock ratings (and banking clients) is:
Global Ratings Distribution
Outperform/Buy*
39%
(62% banking clients)
Neutral/Hold*
43%
(57% banking clients)
Underperform/Sell*
15%
(50% banking clients)
Restricted
3%
*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and
Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock
ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should
be based on investment objectives, current holdings, and other individual factors.
How to Spend Your Lai See
38
22 February 2007
Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments
with the subject company, the sector or the market that may have a material impact on the research
views or opinions stated herein.
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Investment
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Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not
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Credit Suisse Standard Securities (Proprietary) Limited (“CSSS”) is the name provided to the Joint Venture
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Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--NonVoting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.
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Disclaimers continue on next page.
How to Spend Your Lai See
39
22 February 2007
Asia Pacific / Thailand
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